Euro zone bond yields struggle for direction, U.S. data in focus

Investors will focus on April's U.S. Producer Price Index (PPI), to be released on Tuesday, and the Consumer Price Index (CPI) and retail sales data on Wednesday. Germany's 10-year government bond yields, the bloc’s benchmark, fell 2 basis points (bp) to 2.496%.

Euro zone government bond yields struggled for direction on Monday, with investors on hold ahead of U.S. figures following a data-light week. Investors will focus on April's U.S. Producer Price Index (PPI), to be released on Tuesday, and the Consumer Price Index (CPI) and retail sales data on Wednesday.

Germany's 10-year government bond yields, the bloc’s benchmark, fell 2 basis points (bp) to 2.496%. Markets price in 69 basis points (bps) of ECB rate cuts in 2024, from 67 late Friday, and 45 bps for the Fed.

Some analysts argued that a further widening divergence between the ECB and the Fed policy paths would weaken the euro and fuel inflation, forcing the ECB to tighten its monetary policy. Others highlighted that the ECB can become more cautious in its easing cycle because of signs of wage data pressure. "If wage growth does not eventually slow as country-level data now suggest is a risk, coupled with ECB-speak turning increasingly more hawkish, especially from dovish members, in response to data outturns, this risks the ECB eventually cutting more cautiously," said Andrzej Szczepaniak, economist at Nomura.

ECB's Vice President Luis De Guindos said last week the number of future rate cuts would also depend on the evolution of salaries, recalling that the Fed's interest rate decisions influence the U.S. dollar exchange rate and the global economy. Italy's 10-year yield fell 1 bp to 3.837%. The gap between Italian and German bonds - a gauge of the risk premium investors seek to hold bonds of the euro area's most indebted countries - was at 133 bps from around 120 bps before the release of the first data about the sale of an Italian bond aimed at retail investors.

Orders for Italy's new 6-year BTP Valore have risen above 11 billion euros, Bourse data showed on Friday, while the previous edition attracted bids worth 18.3 billion euros. Demand from retail investors has supported bond prices for months, but analysts reckon that the outcome of the recent sale will not impact Italy's yield spread further.

They said households' allocation towards fixed income has room to grow as it remains low from a historical perspective, and global credit risk appetite has recently been the most reliable guide to pricing Italian sovereign bonds. The spread between German and Spanish 10-year government bond yields was flat at 78.3 bps after Spain's Socialists won the biggest share of the vote in Sunday's Catalan elections, dealing a serious blow to more than a decade of independence dreams.

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