Euro zone yields fall again as bond rally resumes

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 wait for more top-tier economic data from the U.S. and Europe.

Euro zone bond yields fell on Tuesday after rising the previous day as last week's rally in bond markets resumed, aided by data which showed Germany's industrial downturn is worsening. 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 5 basis points (bps) at 2.691%. 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 wait for more top-tier economic data from the U.S. and Europe. "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. "German industrial production fell more than expected, with most sub-sectors showing negative monthly readings," said Jussi Hiljanen, head of rates strategy at SEB. "As such it adds to the picture of the stalling euro area economy."

Investors were keeping an ear out for central bank speakers' views on the likely path of interest rates. European Central Bank vice president Luis de Guindos on Tuesday said the euro zone's economy is likely to contract or at best stagnate in the fourth quarter.

Other 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 7 bps at 4.516%.

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. Germany's 2-year bond yield, which is sensitive to expectations about ECB interest rates, was last 2 bps lower at 3.073%. 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 to keep 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.