Euro zone bond yields drop as price pressures ease in France, Germany

Euro zone bond yields fell for a third day on Wednesday after data from France and Germany showed price rises cooled in May, although inflation in Italy slowed less than expected.

Euro zone bond yields fell for a third day on Wednesday after data from France and Germany showed price rises cooled in May, although inflation in Italy slowed less than expected. Germany joined a list of major euro zone economies reporting a bigger-than-expected drop in inflation, adding to arguments for caution on rate hikes.

French consumer price inflation cooled to 6% in May, its lowest level in a year. Italy's EU-harmonised consumer prices slowed to an annual pace of 8.1% in May from 8.7%, but was still above a median forecast of 7.5% in a Reuters survey of analysts. That followed data on Tuesday which showed Spanish inflation slowed more than expected in May, raising the possibility that the European Central Bank may be closer to the end of its monetary policy tightening cycle than previously thought.

"Inflation remains high but overall price pressures are easing, and this means that central banks may need less restrictive monetary policy," said Sebastien Fellechner, rates analyst at DZ Bank, who still expects two more 25-basis-point rate increases. Germany's 10-year government bond yield, the benchmark for the euro area, was down 6.5 basis points (bps) at 2.28%, after hitting its lowest level in two weeks at 2.24%.

Ten-year bond yields in Italy, Spain and France were all down between 4 to 7 bps. The ECB has raised interest rates by a combined 375 bps since the summer of last year, taking the deposit rate to 3.25%, as it attempts to bring inflation down to target. Inflation data for the whole euro area will be released on Thursday.

Money market traders are now pricing in a peak in the ECB's deposit rate in September from December previously. September 2023 ECB euro short-term rate (ESTR) forwards were at 3.6%, implying a peak in the ECB deposit facility rate of 3.7%. The December forward peaked above 4% before troubles emerged at U.S. regional banks in March.

Yields at the shorter end of the curve, which are more sensitive to changes in interest policy, also fell. Germany's 2-year government bond yield dropped 8 bps to 2.74%.

France's 2-year yield was down 5 bps, Spain's fell 9 bps and Italy's dropped 9.5 bps. "The move in euro zone bonds makes sense so far, given that we've seen inflation numbers come in a bit softer than expected, except for Italy," said Joann Spadigam, European rates strategist at NatWest Markets.

"It confirms the story of where the ECB is likely to land for the terminal rate," Spadigam added, saying NatWest expects the ECB deposit rate to peak at 3.5%. ECB Vice President Luis de Guindos called the recent inflation data from the euro area "positive", while French policymaker Francois Villeroy de Galhau said inflation may be past its peak in France.

Benchmark U.S. 10-year Treasury yields moved lower on Wednesday after data showed lower euro zone inflation, ahead of a key U.S. congressional debt ceiling vote.

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