Euro area sovereign bond yields rise ahead of Fed, US data

Euro area borrowing costs dropped slightly in the last few days despite inflation data falling below market expectations as investors foresee policy rates steady at current levels for an extended period. Germany's 10-year government bond yield, the benchmark for the euro area, rose 3 basis points (bps) to 2.83% on Wednesday.

Euro zone bond yields rose on Wednesday, mirroring their U.S. peers, ahead of the outcome of the Federal Reserve's policy meeting and release of key U.S. economic data later in the day.

U.S. Federal Reserve officials will likely leave policy rates on hold as borrowing costs for businesses and consumers have kept climbing. Euro area borrowing costs dropped slightly in the last few days despite inflation data falling below market expectations as investors foresee policy rates steady at current levels for an extended period.

Germany's 10-year government bond yield, the benchmark for the euro area, rose 3 basis points (bps) to 2.83% on Wednesday. It fell less than 3 bps over the last two days, during the release of the bloc's inflation data. The yield on the benchmark 10-year U.S. Treasury note rose 3 bps to 4.90% in early London trade.

European Central Bank policymaker Joachim Nagel said on Tuesday interest rates must be kept sufficiently high for long enough because inflation has not been conquered. Markets also await the U.S. Treasury refunding data for the fourth quarter at 1230 GMT, which will detail the split of issuance across bonds and bills after Monday's announcement of overall supply.

"Our U.S. colleagues expect further increase in coupon issuance but suspect that an increased supply is likely already priced from a sentiment standpoint and a relief rally is likely post the refunding announcement," said Aman Bansal, European rate strategist at Citi in a research note. Wednesday's U.S. data include the Labor Department's Job Openings and Labor Turnover Survey (JOLTS) and the manufacturing survey from the Institute for Supply Management (ISM).

Investors will closely watch the JOLTS figures, which have been a source of surprise in recent months, and the labour market sub-index in the non-manufacturing index, which is more important given the weightings of the respective sectors. Confirmation that the labour market remains tight will further fuel inflation fears.

Analysts expect the Fed not to raise rates and will focus on any hint about its December decision. They forecast unchanged rates at the end of 2024 but with risks of a surprise hike. Italy's 10-year government bond yields, the benchmark for the euro area periphery, rose 4 bps to 4.77%.

The gap between Italian and German 10-year yields – a gauge of the risk premium investors ask to hold debt of the euro zone's most indebted countries – was at 191 bps, near its tightest level since early October. Late on Friday, DBRS confirmed Italy's rating of BBB (high) with a stable outlook, soothing fears of a downgrade which would have hurt bond prices, driving their yields higher.