Euro zone yields rise after recent bond rally, periphery in focus

December 2024 ECB euro short-term rate forwards were last at 2.97%, implying a deposit facility rate of around 3.1% by year-end, from the current 4%. ECOFIN MEETING Yield spreads between core and peripheral bonds will be in focus this week as the next Ecofin meeting of the EU's 27 finance ministers in Brussels could discuss a new document on European fiscal rules, including buffers for economic shocks, analysts said, citing media reports. Rating jitters could hit Italian yield spreads ahead of rating reviews by Fitch on Friday and Moody's next week.

Euro zone borrowing costs rose on Monday as investors took a breather after bonds rallied sharply last week, sending the benchmark Bund yield to a seven-week low. U.S. Treasuries have been in the driver’s seat, with a combination of weak momentum in economic data and a more benign than expected refunding announcement pushing yields sharply lower over the week, analysts said.

Government bond prices on both sides of the Atlantic are likely to stabilise in a calendar-light week as investors will wait for further evidence before increasing exposure to fixed income, they said. The benchmark 10-year Bund yield rose 9 bps to 2.728% on Monday after recording its biggest weekly fall in five months. Last week it hit 2.629%, its lowest since Sept. 15.

Italy's 10-year yield rose 12 bps to 4.569%. The gap between Italian and German 10-year yields - a gauge of risk premium investors ask to hold bonds of the euro area's most indebted countries - at 183 bps. It hit a two-week low at 173.70 last Friday. Money markets recently increased their bets on ECB rate cuts. On Nov. 2 they were pricing in up to 100 basis points of cuts to the deposit facility rate by December 2024, before winding back to around 95 bps.

They had expected 80 bps of rate cuts on Oct. 30. December 2024 ECB euro short-term rate forwards were last at 2.97%, implying a deposit facility rate of around 3.1% by year-end, from the current 4%.

ECOFIN MEETING Yield spreads between core and peripheral bonds will be in focus this week as the next Ecofin meeting of the EU's 27 finance ministers in Brussels could discuss a new document on European fiscal rules, including buffers for economic shocks, analysts said, citing media reports.

Rating jitters could hit Italian yield spreads ahead of rating reviews by Fitch on Friday and Moody's next week. U.S. Treasuries yields rose in London trade, pulling global bond yields higher. The 10-year Treasury yield was last up 8 bps at 4.635%.

"Given a lack of top-tier data, the focus is likely on how Federal Reserve speakers weigh long-end rates in their policy assessments," Padhraic Garvey, regional head of research for the Americas at ING, said in a research note. "Some pushback given the recent rally should not surprise - Powell had emphasised that changes in broader financial conditions would have to be persistent in order to impact the policy path," he added.

Fed Bank of Atlanta President Raphael Bostic said on Friday that the economy's current path appears to indicate that further rate increases will not be required. Commerzbank analysts highlighted that Bostic supported holding rates steady "for about 8-10 months".

On the euro area front, ECB president Christine Lagarde said that slowing inflation was "certainly our forecast". "We are determined to bring inflation down to 2%. According to our projections, we will get there in 2025," Lagarde added.

Investor morale in the euro zone rose more than expected at the start of November, with expectations for the future at their rosiest level since early this year, a survey showed on Monday.