German debt price up on weaker data; Italian 10-year yield hits 1-year low

For the Italian 10-year government bond, the yield fell to its lowest in more than a year at 0.765% as traders expected more monetary policy stimulus from eurozone's central bank. "People think it's a little bit of a one-way bet on more stimulus being required from the ECB," said Lyn Graham-Taylor, fixed income strategist at Rabobank. On Tuesday, dovish comments from the European Central Bank chief raised expectations for further stimulus.

The price for benchmark German debt increased on Wednesday after German industrial output unexpectedly slipped in August, suggesting the recovery in Europe's largest economy from the coronavirus shock could be weaker than hoped. German 10-year yields fell 1.6 basis points to -0.52% after inching to a two-week high on Tuesday.

The day before, the gap between German and U.S. 10-year yields widened to its largest since March as U.S. yields rose. They gave back those gains after President Donald Trump on Tuesday abruptly cancelled talks in Washington over coronavirus aid. For the Italian 10-year government bond, the yield fell to its lowest in more than a year at 0.765% as traders expected more monetary policy stimulus from eurozone's central bank. It last traded down 1.6 bps.

On Friday, the Italian 10-year Bund yield fell to a record low of 0.751%, Tradeweb said. "People think it's a little bit of a one-way bet on more stimulus being required from the ECB," said Lyn Graham-Taylor, fixed income strategist at Rabobank.

On Tuesday, dovish comments from the European Central Bank chief raised expectations for further stimulus. If the euro strengthened, that would increase the likelihood of ECB easing, Graham-Taylor said.

"If the dollar is stronger, it is probably due to some risk-off factors and this is probably also going to encourage the ECB to have to do more easing," he added. Traders await minutes from the Federal Reserve to be released later in the day.

ING analysts said they did not expect the minutes "to be an existential threat to the reflation trade taking hold in dollar rates markets." Still, forward Fed Fund rates price in the first full hike only by the middle of 2024, which is slightly more hawkish than before the announcement of the average inflation target, ING said.

"This move higher in expected policy rates could accelerate should the minutes highlight that the Fed has merely given itself the option, rather than given a hard commitment, not to raise rates preventively."

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