Bund yields hit highest level in over 15 years before ECB meeting

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By Stefano Rebaudo

Sept 10 (Reuters) - Euro zone government bond yields held just below multi-year highs on Thursday, with investors on the sidelines ahead of the European Central Bank's policy decision later in the session.

Analysts expect the central bank to raise rates by 25 basis points (bps), not provide any guidance and reiterate its data-dependent approach.

Germany's 10-year bond yield DE10YT=RR was up 0.5 basis points at 3.44%, after reaching 3.4514% earlier in the session, the highest since April 2011.

Some market participants argued that ECB rate-hike expectations had gone too far, as higher energy prices were likely to weigh on growth and help dampen inflation. They also said borrowing costs could fall sharply were the central bank to strike a more dovish tone.

Traders priced the ECB's deposit rate at 2.74% by December, up from the current 2.25%, implying almost two 25-bp rate hikes. By September 2027, markets saw the rate at 3.10%, fully pricing in a third increase and pointing to a roughly 40% chance of a fourth move.

"It will be intriguing how (ECB President Christine) Lagarde will address the developments in bond markets," Erik Liem, strategist at Commerzbank, said.

"While it may be too early for the ECB's October 2023 playbook, even minor hints in this direction could have a significant impact today," he added.

Following a series of rate increases after Russia's 2022 invasion of Ukraine sent European energy prices soaring, the ECB kept rates unchanged after a September 2023 hike and resisted calls for further tightening.

Energy prices dropped slightly on Thursday with Brent crude futures holding above $100 a barrel as traders braced for deeper supply disruptions.

"With markets already pricing in a very hawkish outlook, we still think a dovish surprise from the ECB is more likely," ING said in a research note.

German 2-year bond yields DE2YT=RR, more sensitive to policy rates, fell 2 bps to 3.03% after reaching 3.0658% early in the session, the highest since June 2024.

Italy’s 10-year government bond yields IT10YT=RR rose one bp to 4.29%, after hitting 4.2990%, the highest since November 2023. The yield gap versus safe-haven Bunds was at 81.50 bps.

(reporting by Stefano Rebaudo; Editing by Joe Bavier and Toby Chopra)

((stefano.rebaudo@tr.com))