ECB'S MAKHLOUF SAYS FINANCING CONDITIONS TIGHTER AFTER YIELDS ROSE

The European Central Bank's Makhlouf reported that financing conditions in the euro area have tightened, with the tightening attributed to the recent rise in government and corporate bond yields. The transmission runs through the rate channel: higher long-term yields raise borrowing costs for households and firms, feed into lending rates, and reduce the appeal of credit-sensitive investment, effectively doing some of the work a policy rate hike would otherwise have to do. Euro-area sovereign bonds and bank equities are most directly exposed, since bond repricing lifts funding costs and weighs on bank net interest margins and loan demand expectations. The euro itself may also be sensitive to any shift in relative yields against other major markets. Traders should watch the next ECB Governing Council communication and euro-area lending survey data for signs of whether this tightening is persisting in actual credit flows.

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