Rates as of 0500 GMT

Market Recap

Two big Reuters stories sent EUR higher. First, an article saying that the European Central Bank ECB was considering a largerthanexpected 50 bps rate hike at its meeting Thursday, despite having said several times that it would be 25 bps. This would be coupled with a deal to protect the bond markets of heavily indebted countries read Italy, with some conditions like they stick to European Commission rules on reforms and budget discipline.

The market swiftly repriced the likelihood of a 50 bps hike on Thursday, although there remains considerable skepticism about it.

At the same time, Italian bond spreads came in somewhat in anticipation of a relatively strong antifragmentation tool being implemented, one strong enough to allow them to make such a big jump in rates.

Is a 50 bps hike possible? The statement following the June meeting stated unequivocally that the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting. This was agreed unanimously and reaffirmed by ECB President Lagarde at the Sintra symposium. The story may be just a trial balloon to see what the market reaction would be or to put pressure on the doves on the Governing Council. On the other hand, it could indicate a deal between the hawks and the doves a bigger rate hike to satisfy the hawks vs a stronger antifragmentation tool to satisfy the doves.

Secondly, Reuters also reported that Russian gas flows…