Euro zone bonds hold steady as investors eye 2024 rate cuts

Euro zone bond yields edged lower 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 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 edged lower 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 3 basis points at 2.63%, 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 past 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 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 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 down 6 bps at 4.50%. Portugal's 10-year bond yield was trading in line with its euro zone peers, down 3 bps at 3.38%, a day after President Antonio Costa resigned amid a corruption investigation.

State Street's Graf said yields could rise if Federal Reserve speakers signal that interest rates will not fall any time soon. It is far too early to talk about cutting the ECB interest rates as inflation is a "very greedy beast" that is hard to beat, ECB policymaker Joachim Nagel said on Wednesday.

Germany's 2-year bond yield, which is sensitive to expectations about ECB interest rates, was last up 1.5 bps at 3.08%. It has fallen from a 15-year high of 3.393% in July.