Euro zone bond yields edge down ahead of busy data week

Article content

Euro zone government bond yields edged down on Monday but remained close to their highest levels in over a decade, as investors recently scaled back expectations of a short monetary tightening cycle.

Trading will likely be subdued as markets await data on euro area Global flash PMIs on Tuesday, Federal Reserve minutes on Wednesday and the U.S. Personal Consumption Expenditures index — the Fed’s preferred measure of inflation — on Friday.

Article content

U.S. markets are closed on Monday for Presidents’ Day.

Article content

Analysts said a firmer growth and inflation outlook in the U.S. had been driving global fixed-income markets even if the European Central Bank’s hawkish remarks further boosted last week’s bond selloff.

The upward euro area rate repricing may hold in the near term, given continued concerns on wage dynamics in the region and its implications for persistence in underlying inflation.

Germany’s 10-year government bond yield, the bloc’s benchmark, dropped 2 basis points (bps) to 2.439%. It hit its highest since August 2011 at 2.569% at the beginning of January.

German 2-year yields, more sensitive to changes in policy rates, were flat to 2.872% after hitting a new 14-year high at 2.943% last Friday. It first rose to levels last seen in late 2008 at the end of September 2022.

Article content

Last Friday, the ECB’s Isabel Schnabel said markets could underestimate inflation, supporting an upward repricing of the terminal rate. At the same time, Bank of France governor Francois Villeroy de Galhau flagged excess volatility in expectations about the level where rates will peak capping a further rise in bond yields.

“As Villeroy’s statements have been good indications about the bipartisan consensus in the Council, this should take some steam out of ECB terminal rate expectations of 3.75% for the time being,” said Rainer Guntermann, rates strategist at Commerzbank.

According to ECB short-term euro rate (ESTR) forwards, the ESTR will peak in September at 3.6%, implying expectations for a depo rate of around 3.7%.

Article content

The ESTR published by the ECB reflects banks’ wholesale euro unsecured overnight borrowing costs. It is usually around 10 bps below the deposit rate.

Consumer price dynamics remain the primary concern as they have subdued recently, reflecting an easing of energy prices, while the turning point in core inflation is not yet visible across all major economies.

A key market gauge of inflation expectations has been above 2.4% since late last week.

Italy’s 10-year government bond yield, seen as the benchmark for the euro area periphery, dropped 0.5 bps at 4.293%, with the spread between Italian and German 10-year yields at 185 bps.

The Italian 2-year yield was up 1 bps at 3.437% after hitting its highest since August 2012 at 3.558% on Friday. (Reporting by Stefano Rebaudo, editing by Ed Osmond and Sharon Singleton)