Euro area sovereign bond yields slip after Treasury increases auction sizes

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. Italy's 10-year government bond yields, the benchmark for the euro area periphery, fell 6.4 bps to 4.66%, after hitting an almost three-week low.

Euro zone bond yields fell to multiple weeks low on Wednesday, mirroring their U.S. peers, after the release of U.S. economic data and ahead of the outcome of the Federal Reserve's policy meeting. Yields fell across both side of the Atlantic after the Treasury Department said it planned to "gradually" boost the size of its debt auctions to meet financing needs, while a smaller-than-expected increase in U.S. private payrolls took some steam out of a still tight labour market.

Germany's 10-year government bond yield, the benchmark for the euro area, fell 5 basis points (bps) to 2.75%, briefly hitting a two-week low. The yield on the benchmark 10-year U.S. Treasury note also dropped to a two-week low, last down 7.6 bps to 4.80%.

“We’re certainly seeing a well-deserved relief rally in bonds," said Steve Sosnick, chief strategist, Interactive Brokers. "There were fears that the refunding would be more weighted to the long end of the curve than what was eventually announced."

Later in the day, financial markets expect the U.S. central bank to keep interest rates on hold at the end of a two-day policy meeting. The release of new U.S. labour market data showed the number of job openings compared to the number of people looking for work remaining elevated.

In the euro area, yields had dropped slightly this week, despite data showing inflation fell below market expectations, as investors foresee policy rates steady at current levels for an extended period. 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.

Italy's 10-year government bond yields, the benchmark for the euro area periphery, fell 6.4 bps to 4.66%, after hitting an almost three-week low. 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 190 bps. It recently hit 186.4 bps, 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.