Euro zone yields edge up ahead of ECB loan repayments


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LONDON — Euro zone government bond yields inched up on Friday but were set for a second successive week of declines for the first time since July, ahead of an update from the European Central Bank on repayments of its emergency loans to commercial banks.

The euro zone’s central bank will announce at 1105 GMT how much banks plan to repay of the 2.1-trillion-euros ($2.17 trillion), multi-year credit they have taken under its Targeted Longer-Term Refinancing Operations (TLTRO).

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This repayment is voluntary, but the ECB last month incentivised banks to repay by taking away a rate subsidy, and analysts expect lenders to repay around half a trillion euros worth of TLTRO loans at this week’s window.

“A higher-than-expected repayment today could have a negative impact on the front end of peripheral bonds, which were the main beneficiaries of the carry trade,” said analysts at Jefferies who forecast 600 billion in repayments.

A carry trade typically involves borrowing in a currency or market where interest rates are low, to invest in one where they are higher.

The Italian 2-year bond yield was 2.75% in early trading, up 5 basis points.

The Italian 10-year bond yield was 5 basis points higher at 3.99% though heading for a 20 basis point weekly fall, its second in succession after dropping 27 basis points a week before.

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Hopes that central banks around the world, and particularly in the United States are nearing the end of their program of interest rate hikes has been supporting government bond prices this month, particularly after cooler-than-expected U.S. inflation numbers. The yield on Germany’s 10-year government bond, the benchmark for the eurozone, was last up 1 basis point at 2.04%. It is on track for around a 10 basis point weekly drop, after posting a similar fall the previous week.

This would be the first time either Italian or German 10 year yields have fallen for two weeks in succession since July.

With falls in Italian yields outpacing German ones, the spread between the yields on the two countries’ 10 year bonds tightened to 186.9 basis points in early trading, around its lowest since July. (Reporting by Alun John; Editing by Simon Cameron-Moore)


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