Euro zone government bond yields fell on Monday as worries about a possible Russian attack on Ukraine boosted demand for safe-haven assets in a cautious market ahead of this week's Federal Reserve policy meeting.
The United States on Sunday ordered the departure of family members of staff at its embassy in Ukraine, while U.S. President Joe Biden weighed options for boosting America's military assets in Eastern Europe.
The Fed ends its two-day meeting on Wednesday and investors expect the U.S. central bank to raise rates four times this year starting in March and shrink its balance sheet size. Markets are now pricing an 85% chance of a 25 basis point Fed hike in March and three more to 1.0% by year-end. IRPR
"Powell will probably not fuel the 50bp (March) lift-off scenario and rather reassure that the first steps will be measured," Commerzbank analysts said in a note to clients.
"We consider the quantitative tightening (QT) discussion the larger risk," they added.
Germany’s 10-year government bond yield fell 2.5 basis points to -0.086% DE10YT=RR , after briefly hitting a day low at -0.102%.
The current situation might be the calm before the storm, Deutsche Bank said.
"There’s a tail risk of an even bigger hawkish surprise (from the Federal Reserve) over the months ahead, with the possibility that the Fed raises rates in March and then goes onto raise rates 6 or 7 times this year," it said in a note.
Euro zone PMI data showed the euro zone economic recovery weakened this month, despite an upturn in Germany.
DRAGHI'S FUTURE IN THE SPOTLIGHT
Italian presidential elections will also be in investors' focus, as Prime Minister Mario Draghi is among the leading candidates. The first round of votes which starts at 1400 GMT on Monday is seen as inconclusive.
Analysts are worried about snap election risks if Draghi were to be elected. But for now they're betting on former ECB chief Draghi keeping his job as prime minister or becoming president, but with the current government remaining in office until 2023.
Berenberg economists dubbed this scenario "business as usual" as Italy could enjoy a relatively stable 2022.
Italy’s 10-year bond yield fell 3.5 basis points to 1.319%, with the spread between Italian and German 10-year yields tightening to 140 basis points.
However, a disruption in the political backdrop might negatively affect the Italian economy and its debt sustainability as Italy has to meet 100 EU recovery fund objectives in 2022 to get the European Union funds, Barclays recently argued in a research note.
(Reporting by Stefano Rebaudo, editing by Tomasz Janowski and Emelia Sithole-Matarise) ((firstname.lastname@example.org; +390266129431;))