Euro area bond yields drop after inflation data, ahead of Fed meeting

Euro zone yields fell on Monday as inflation data from Spain and Germany looked unlikely to derail a European Central Bank interest rate cut in June, while the market cautiously awaited this week's Federal Reserve policy meeting.

Euro zone yields fell on Monday as inflation data from Spain and Germany looked unlikely to derail a European Central Bank interest rate cut in June, while the market cautiously awaited this week's Federal Reserve policy meeting. Data on Monday showed that German and Spanish inflation rose slightly in April. German consumer prices rose 2.4% in April, compared with 2.3% year-on-year in March. Spain's figures showed a 3.4% rise, slightly above the 3.3% expected by analysts polled by Reuters.

Despite the uptick in the two countries, the bloc's inflation, which will be released on Tuesday, is expected to remain at 2.4%, unchanged from the previous month, according to economists polled by Reuters. Markets are still pricing an ECB cut in June, and they last discounted 70 bps of ECB monetary easing this year from 65 bps late on Thursday.

But investors are waiting for further clues on the Fed policy path to firm their outlook for ECB rates beyond June, with the euro area's fixed income market continuing to track moves in U.S. Treasuries. "Markets are likely to be in limbo ahead of the Federal Reserve meeting on Wednesday," said Paul Donovan, chief economist at UBS Global Wealth Management.

"On several measures, U.S. inflation could be considered already within the target range. With disinflation evident across market-driven prices, it seems clear that Fed policy has done what it was supposed to," he added. Money markets see the Fed holding rates this week, and aren't yet fully convinced a cut will come in September, according to CME FedWatch Tool.

The yield gap between Bund and the 10-year Treasury - a gauge of the expected divergence between the ECB and Fed policy paths – widened around 2 bps to 210 bps. It hit 220.92 in mid-April, its highest since end-2019. Germany's 10-year government bond yields - the bloc's benchmark – dropped 5.6 bps to 2.52% after hitting on Thursday 2.647%, its highest level since the end of November.

Spain's 10-year government bond yield was at 3.29%, down 7 bps, in line with peers, after the country's Prime Minister Pedro Sanchez said he had decided to stay on as prime minister after saying last week he was taking several days away from public duty to consider quitting. Italy's 10-year bond yield, the benchmark for the euro area periphery, fell 7.8 bps to 3.81%.

Germany's 2-year yields - more sensitive to policy rate expectations – dropped 4 bps to 2.94%.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)