* German 2, 5-year bond yields touch five-week highs
* France/Germany 10-year yield spread hits fortnightly peak
* ECB's Nowotny raises prospect of rate rise before end of
* Money market expectations for Dec rate hike jump
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, March 17 Short-term borrowing costs in
Germany hit five-week highs on Friday on comments from ECB
policymaker Ewald Nowotny that the bank could raise interest
rates before the end of bond-buying stimulus in the bloc.
The Austrian central bank governor told a newspaper on
Thursday that the European Central Bank (ECB) would decide later
whether to raise interest rates before or after ending its
bond-buying scheme. He said the ECB could hike its deposit rate,
currently below zero, before the main rates at which it lends to
Nowotny's remarks come just a week after the ECB signalled a
diminishing urgency for policy action. Reports that some ECB
officials had discussed the possibility of rate hikes have also
jolted a bond market that has for years been underpinned by
ultra-easy monetary policy.
Globally, central banks are beginning to move towards
The U.S. Federal Reserve hiked rates on Wednesday for the
second time in three months while China's central bank raised
short-term rates on Thursday. The same day, a Bank of England
meeting ended with one policymaker voting for a rate rise.
"When you connect the dots it almost appears as if central
banks can sense that sentiment is sufficiently positive for them
to start normalising monetary policy," said Richard McGuire,
head of rates strategy at Rabobank.
Investors on Friday ratcheted up their expectations for when
the ECB will raise interest rates. Money markets show around an
80 percent chance of a move in December -- up from 60 percent a
German two and five-year bond yields scaled five-week highs
at around minus 0.69 percent and minus 0.36 percent
respectively. Though they settled back down as the
session wore on, the 2-year bond yield was still up 2 basis
points at minus 0.80 percent and the five-year was higher on the
day at minus 0.42 percent.
Meanwhile, the France/Germany yield spread hit a two-week
high on opinion poll gains for far-right leader Marine Le Pen.
The gap between France and Germany's 10-year borrowing costs
rose to a two-week high of 67 basis points.
A poll showing French presidential candidate Le Pen had
extended her first-round lead over centrist candidate Emmanuel
Macron helped push yields on safe-haven German Bunds
a touch lower as well.
France elects its next president in two rounds of voting in
April and May.
TIME FOR CHANGE?
Nowotny's comments also rippled through currency markets,
with the euro touching five-week highs against the dollar
"The market has been listening to the ECB's forward guidance
for a long time and pricing that in," said Peter Chatwell, head
of European rates at Mizuho. "So now to hear a different tune
from the ECB inevitably means there has to be a change in
The ECB has been under pressure to start scaling back its
massive bond-buying stimulus as economic growth and inflation
But with underlying price pressures still subdued and the
region facing elections in big economies France and Germany, the
central bank faces a delicate balancing act.
Analysts said raising the minus 0.40 deposit rate before
ending QE could be one way for the ECB to ease that pressure
without having a major impact on overall monetary tightening.
"It is possible that the ECB could raise the depo rate
before QE ends," said Lorenzo Codogno, chief economist at LC
Macro Advisors. "It would have a signalling effect and, more
importantly, deflate some of the pressure to start scaling back
(Additional reporting by Abhinav Ramnarayan; Editing by Julia