By Yoruk Bahceli

(Reuters] – The Euro zone’s money markets increased Friday their stakes in a 50 basis point interest rate increase by the European Central Bank in Juli that would lower the bank’s policy rate from 0% to 0%.

Klaas Knot (ECB policymaker and Dutch central bank governor) stated on Tuesday that the bank could consider a 50 bps rise if upcoming data suggest inflation “broadening further, or accumulating”.

Market expectations were shifted by Knot’s speech, which led traders to price in 36 bps more hikes for July. This suggested that a 25-bps increase is completely priced in and there’s a 50 percent chance of another 25 bps.

“Even if it is a minor view at the ECB (Knot’s), I think we can now accept that 25 basis points during this meeting is going be the minimum,” said Antoine Bouvet.

Tradeweb data shows that rising bets for a hike of 50 bps have led to a 16-bps increase in Germany’s 2-year yield.

Tradeweb revealed that the 2-year yield rose by 11bps in comparison to the 10-year, the largest move in yield curve since March 2020’s peak of the COVID-19 pandemic.

It was at 60 bps on Friday, which is just below the flattest level since February.

U.S. Treasury yields curve flattening is a major theme with a short inversion March. But the steepness and uncertainty of the German curve have been long puzzled analysts due to a weaker outlook for euro-area growth.

Jens Petersen, the chief analyst at Danske Bank saw the flattening in light of the “rising expectations that the ECB might front-load rate rises similar to the ones we have seen elsewhere”

Sorensen explained that growth fear should continue. This will lower longer-dated yields and central banks will apply pressure to shorter-dated yields.

(Graphic: Yield curves, https://fingfx.thomsonreuters.com/gfx/mkt/gdpzyedyyvw/yield%20curves%20may%2020.png)

The eurozone bond yields increased across the wider market after two days of heavy falls. This was due to a crash in stock markets and refocus on growth worries. Prices are inversely related to yields.

The 10-year Italian bond yield increased by 8bps to 2.985%, according to 1457 GMT. The gap between German and Italian 10-year bond yield spreads rose by 200 bps in the meantime. This was the largest increase in over one week.

European stocks rose on Friday as China cut a key lending standard to help a slowing economy. But, some of those gains were lost towards the end.

It was higher than its earlier peak of 6 bps. Germany’s 10-year yield on bonds – which serves as a benchmark for the Euro zone – rose 1 bps to 1456 GMT (0.95%) after falling from previous highs. On Wednesday and Thursday, it had dropped 12 bps.

Eurozone consumer confidence increased by 0.9 points between April and May, according to figures that were released Friday afternoon. A flash estimate by the European Commission showed that consumer sentiment in euro zone rose to -21.1 from -22.0 in March.