Euro zone bond yields hold steady as investors eye 2024 rate cuts

Euro zone bond yields were little changed on Wednesday as investors weighed signs of an economic slowdown against a survey which showed consumers' inflation expectations rose in September. Yet an ECB survey showed that consumers have raised their expectations for inflation over the next 12 months to 4% in September, from 3.5% in August. Euro zone yields picked up slightly after the data.

Euro zone bond yields were little changed on Wednesday as investors weighed signs of an economic slowdown against a survey which showed consumers' inflation expectations rose in September. Germany's 10-year bond yield, the benchmark for the bloc, was last down 2 basis points at 2.652%, just above an almost two-month low of 2.629% hit last week. Yields move inversely to prices.

International bond yields have fallen sharply over the last two weeks after the European Central Bank, Federal Reserve and Bank of England left interest rates on hold at their latest meetings. Some weaker-than-expected U.S. economic data and a tweak to U.S. Treasury debt issuance plans have also cooled yields. "I'm a bigger fan of duration (longer-dated bonds) than I was six months ago, as inflation is not a problem as it was six months ago and growth is slowing," said Tim Graf, head of macro strategy for Europe at State Street Global Markets.

Figures on Tuesday showed that Germany's industrial downturn is deepening, adding to a picture of a sharply slowing euro zone economy. Investors expect ECB interest rates to fall by around 90 bps by the end of 2024, according to pricing in derivatives markets on Wednesday.

A market-based gauge of long-term inflation expectations, five-year five-year inflation swaps, fell to its lowest since May on Tuesday and hovered around that level at 2.44% on Wednesday. Yet an ECB survey showed that consumers have raised their expectations for inflation over the next 12 months to 4% in September, from 3.5% in August.

Euro zone yields picked up slightly after the data. Italy's 10-year bond yield was last roughly flat at 4.551%. Portugal's 10-year bond yield was trading in line with its euro zone peers, little changed at 3.41%, a day after President Antonio Costa resigned amid a corruption investigation.

With the economic calendar relatively light, investor focus was on central bank speakers, particularly Fed Chair Jerome Powell, who is set to talk at 1415 GMT. State Street's Graf said yields could rise if Federal Reserve speakers signal that interest rates will not fall any time soon.

ECB official and German Bundesbank chief Joachim Nagel on Wednesday said the final phase of lowering euro zone inflation may be the toughest. The ECB held rates steady at a record high of 4% last month. Germany's 2-year bond yield, which is sensitive to expectations about ECB interest rates, was last up 2 bps at 3.087%. It has fallen from a 15-year high of 3.393% in July.