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Euro zone bond yields fall as markets weigh upcoming ECB hike

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Euro zone bond yields fell on Wednesday as investors assessed the likelihood that the European Central Bank would hike its policy rate by 75 basis points on Thursday.

The ECB is expected to deliver a second big rate hike this week to tame record-high inflation just as a halt to Russian energy supply fans further price pressures and recession fears in the bloc.

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While markets had priced in more than a 90% chance that the size of that hike would be 75 basis points (bps) earlier this week, they lowered those bets on Tuesday in reaction to several media reports, including one that said a 50 bps rate hike remained on the table.

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On Wednesday, markets had added some of those bets back, now pricing in a 75% chance of such a move, versus below 70% on Tuesday, according to Refinitiv data, but with bets remaining lower than at the start of the week, bond yields fell.

“The bottom line is that the decision remains open and even the ECB council members themselves probably cannot guess what the outcome will be,” said Christoph Rieger, head of rates and credit research at Commerzbank in Frankfurt.

Germany’s two-year yield, sensitive to interest rate expectations, was down 6 bps at 1.04% by 1004 GMT, but kept above the 0.96% level it fell to on Tuesday.

Germany’s 10-year yield, the benchmark for the euro zone, was down 4 bps to 1.57%.

In Italy, which has come into particular focus given talk of a faster pace of ECB hikes and an election looming in late September, the 10-year yield was down nearly 10 bps to 3.87%. . That pushed the closely watched risk premium over German peers down to 230 bps, having neared 240 bps earlier in the week. In the primary market, Germany raised 1.258 billion euros from the re-opening of a 15-year bond. (Reporting by Yoruk Bahceli; Editing by Jan Harvey and Kim Coghill)

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