Euro zone government bond yields extend fall after U.S. data

Germany's 10-year yield, the benchmark for the euro area, was down 6 basis points (bps) at 2.14%. It was on track for its third week of increases, the longest streak since October, as money markets recently scaled back their bets on 2024 rate cuts, which reached more than 170 basis points in low trading volumes at the end of 2024.

Euro zone government bond yields extended their fall, and money markets increased their bets on future European Central Bank rate cuts on Friday after data showed U.S. producer price inflation was lower than expected in December.

U.S. producer prices unexpectedly fell after a decline in the cost of goods, while prices for services were unchanged, which bodes well for lower inflation in the months ahead. Germany's 10-year yield, the benchmark for the euro area, was down 6 basis points (bps) at 2.14%.

It was on track for its third week of increases, the longest streak since October, as money markets recently scaled back their bets on 2024 rate cuts, which reached more than 170 basis points in low trading volumes at the end of 2024. Money markets were pricing in 152 bps of ECB rate cuts in 2024 from around 145 before the U.S. data and 140 bps late on Thursday.

Chief ECB economist Philip Lane said on Friday, minutes before the release of the U.S. figures, that recent inflation data broadly confirmed current thinking at the ECB, but interest rate cuts are not a near-term topic of debate. Germany's two-year bond yield, sensitive to rate expectations, was last 9 bps lower at 2.54%, compared to 5 bps lower at 2.58% before the producer price figures.

Italy's 10-year bond yield, the benchmark for the euro area periphery, was down 6.5 bps at 3.76%. Short-dated U.S. Treasury yields dropped after the data, with the 2-year yield down 6 bps at 4.20%.