Euro zone bond yields hold steady after sharp drop

Kou and two other analysts said the drop in yields on Monday was in part caused by an Econostream Europe story which said the ECB's next interest rate move was likelier to be a cut than a hike, citing a European Central Bank insider. Inflation data for the euro zone is due out on Thursday and economists expect it to show that price growth cooled to 2.7% year-on-year in November, from 2.9% in October.

Euro zone bond yields were little changed on Tuesday after falling sharply the previous day, with the focus on speeches from European Central Bank officials and inflation data due later in the week.

Germany's 10-year bond yield was last down 1 basis point (bp) at 2.544%, after falling 9 bps on Monday. Yields fall as bond prices rise, and vice versa. Yields in Europe and the U.S. have tumbled since hitting their highest levels in more than a decade in October, as a slowdown in inflation has made further interest rate hikes less likely. Germany's 10-year yield has dropped from a 12-year high of 3.024% in early October.

Sean Kou, rates strategist at Societe Generale, said a lack of top-tier data and overnight news meant trading was subdued on Tuesday. German central bank chief Joachim Nagel on Tuesday said the European Central Bank's fight against inflation was not over.

"If the inflation outlook worsened, we might have to raise the rate again," he said in Cyprus. Kou and two other analysts said the drop in yields on Monday was in part caused by an Econostream Europe story which said the ECB's next interest rate move was likelier to be a cut than a hike, citing a European Central Bank insider.

Inflation data for the euro zone is due out on Thursday and economists expect it to show that price growth cooled to 2.7% year-on-year in November, from 2.9% in October. Italy's 10-year bond yield was last up 3 bps at 4.336% on Tuesday after falling 10 bps on Monday. It is down from 5.025% last month, an 11-year high.

ECB President Christine Lagarde will deliver a pre-recorded message at a conference today, and Chief Economist Philip Lane is due to speak. The gap between Italy and Germany's 10-year bond yields was last up 3 bps at 178 bps. It fell to a two-month low of 170 bps earlier in November.

Germany's 2-year bond yield, which is sensitive to ECB rate expectations, was last roughly flat on the day at 2.98%. Survey data on Tuesday showed that German consumer sentiment improved slightly heading into the Christmas period but remained at very low levels.

Separate figures showed that lending to euro zone firms dipped into negative territory in October for the first time since 2015. Investors expect around 90 bps of interest rate cuts from the ECB next year, according to pricing in derivatives markets. Expectations have bounced around that level since the start of November.

German inflation data will be released on Wednesday. U.S. personal consumption expenditure inflation, the Federal Reserve's preferred measure, is due on Thursday after the euro zone numbers.