Euro zone bond yields climb as investors tone down rate-cut optimism

Yields, which move inversely to prices, have climbed in 2024 after plunging in November and December as falling inflation and a softer tone from central banks caused traders to price in big falls in borrowing costs this year. Germany's 10-year bond yield, the benchmark for the euro zone, was last up 6 basis points (bps) at 2.18%.

Euro zone bond yields rose on Tuesday, after dipping on Monday, as investors further rowed back on their interest rate-cut bets for 2024 and braced for more government debt issuance. Yields, which move inversely to prices, have climbed in 2024 after plunging in November and December as falling inflation and a softer tone from central banks caused traders to price in big falls in borrowing costs this year.

Germany's 10-year bond yield, the benchmark for the euro zone, was last up 6 basis points (bps) at 2.18%. It dropped around 80 bps in November and December but has since risen more than 15 bps in January. Jussi Hiljanen, head of rates strategy at lender SEB, said he did not see a particular trigger for the rise in yields on Tuesday but said expectations about Federal Reserve and European Central Bank rate cuts have been the dominant driver.

"The trend over the past two weeks in the U.S. and Europe has been for markets to delay rate cut expectations," he said. "I don't see anything to suggest here and now that the ECB is going for a rate cut in March ... they could still do it but it's very uncertain." Italy's 10-year bond yield was last up 5 bps at 3.85%. The closely watched spread over Germany's 10-year bond yield was at 165 bps.

Data on Tuesday showed the euro zone unemployment rate unexpectedly fell to 6.4% in November, a joint record low, from 6.5% in October, but bonds barely budged. Governments issuing large amounts of debt in January have been a factor in the fall in bond prices and were in the spotlight on Tuesday.

Spain and Belgium issued bonds in the morning session, while Germany set a coupon of 2.2% for a new 10-year bond to be sold on Wednesday. "Focus in EGBs (European government bonds) should be on the duration-intensive supply as primary markets face a busy schedule today," Commerzbank strategist Hauke Siemssen said.

Investors on Tuesday continued to temper their expectations for when the first ECB rate cut will come. Money market pricing showed that traders think there is around a 40% chance the first 25-bp cut will come in March, down from almost 45% on Monday and around 70% on Dec. 28.

They envisage roughly 140 bps of cuts coming this year, down from around 170 bps at one point in late December. The ECB's main interest rate is currently at 4%. Germany's 2-year bond yield, which is sensitive to interest rate expectations, was last up 6 bps at 2.85%.

The key event for markets this week is U.S. consumer price index inflation data, due on Thursday. It is expected to show a tick up in inflation to 3.2% in December, from 3.1% in November.