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Title: Euro zone long-term inflation expectations below 2%, yields drop



Jul 11, 2022 05:46AM ET


By: AnalysisWatch


Bond yields in the euro area fell on Monday, while long-term inflation expectations dipped below 2% as recession fears intensified after warnings of a possible disruption in Russian gas supplies.


French Finance Minister Bruno Le Maire said on Sunday the French government was preparing for a complete disruption of Russian gas supplies.


Germany has moved to the second stage of a three-stage gas contingency plan, warning of a recession if Russian gas supplies are halted.


The five-year forward inflation swap fell to 1.9898%, below the European Central Bank's 2% target, the lowest since 2 March.


Analysts continue to expect a fairly aggressive monetary tightening stance until the end of the year, while being more cautious for 2023.


Nielsen mentioned the possibility of the global economy falling into recession in 2023 and inflation rates peaking and probably falling back quite quickly.


Money markets still expect the ECB to raise interest rates by 145 basis points by the end of the year and 200 basis points by the end of 2023.


INFLATION DATA


The yield on 10-year German government bonds, the eurozone benchmark, fell 5 basis points to 1.296%. It had hit a 5-week low of 1.072% last week.


Investors are waiting for US inflation data on Wednesday, which could force another sharp rise in interest rates.


The largest pipeline carrying Russian gas to Germany began annual maintenance on Monday, expected to last 10 days, but governments, markets and businesses are worried the shutdown could be extended because of the war in Ukraine.


ECB policymakers pledged to buy more bonds from heavily indebted countries such as Italy to stem a widening spread between their borrowing costs and those of Germany that could hamper the transmission of monetary policy across the euro area.


Bundesbank chief Joachim Nagel disagreed with the decision and warned against trying to determine the right market spread, saying it was "practically impossible" and risked making governments complacent, the meeting heard. The ECB's help to combat rising sovereign debt yields in some eurozone countries should be conditional.

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