Euro zone bond yields fall again, with central bank speakers in focus

Euro zone bond yields fell slightly on Tuesday after rising the previous day, as investors focused on speeches by central bank officials in a relatively quiet week for economic data. Global yields tumbled last week, dragged lower by a drop in U.S. yields after the Federal Reserve held interest rates steady; the U.S. Treasury said it would issue less longer-dated debt than expected; and data suggested the U.S. economy might be slowing.

Euro zone bond yields fell slightly on Tuesday after rising the previous day, as investors focused on speeches by central bank officials in a relatively quiet week for economic data.

Global yields tumbled last week, dragged lower by a drop in U.S. yields after the Federal Reserve held interest rates steady; the U.S. Treasury said it would issue less longer-dated debt than expected; and data suggested the U.S. economy might be slowing. Germany's 10-year bond yield was last down 3 basis points (bps) at 2.705%. Yields move inversely to prices.

The yield, the benchmark for the euro zone, fell to its lowest in almost two months last week at 2.629%. Emmanouil Karimalis, macro rates strategist at UBS, said bond yields were likely to waver around current levels as investors weigh up incoming data.

"The markets moved a lot last week on the back of data and more dovish central banks … and yesterday we saw some repricing. So I think markets will probably be range-bound and wait for the next set of data," he said. The economic calendar is relatively light this week, although data on Tuesday showed that German industrial production dropped by 1.4% month-on-month in September, far worse than the 0.1% fall economists expected.

Investors were keeping an ear out for central bank speakers' views on the likely path of interest rates. Notable central bank speakers on Tuesday include ECB policymaker and German Bundesbank chief Joachim Nagel and Fed vice chair Michael Barr. Fed Chair Jerome Powell is due to speak on both Wednesday and Thursday.

Italy's 10-year yield was last down 5 bps at 4.535%. The gap between Italian and German 10-year yields was little changed at 182 bps. The so-called spread, a gauge of investor confidence in the euro zone's more indebted countries, narrowed to its smallest since mid-September last week at 174 bps.

On Monday, European Central Bank policymaker Robert Holzmann said the central bank must remain vigilant on inflation and be prepared to raise rates again if needed. The ECB held rates at a record high of 4% at its last meeting in late October. Germany's 2-year bond yield, which is sensitive to expectations about ECB interest rates, was last 1 bp lower at 3.085% on Tuesday. It has fallen from a 15-year high of 3.393% in July.

Australia's central bank raised interest rates on Tuesday, bucking the trend among developed economy central banks for keeping borrowing costs on hold. As of Tuesday, traders saw effectively no chance that the ECB would raise interest rates again, according to pricing in derivatives markets.

Markets think the ECB will cut interest rates by around 95 bps by the end of 2024, having only expected 80 bps of cuts as recently as two weeks ago.