Euro zone bond yields fall slightly after ECB statement, US data

"Today's decision to leave interest rates unchanged, and the tone of the press release, were as expected," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics. "It (the ECB statement) reiterates that interest rates need to remain at their current levels 'for a sufficiently long duration' and monetary policy will remain restrictive 'for as long as necessary'," he added.

Euro zone government bond yields fell slightly after the European Central Bank reiterated rate cuts were not up for discussion as the governing council needs more time to assess the inflation outlook. The ECB kept interest rates unchanged as expected at a record high on Thursday and reaffirmed its commitment to fighting inflation, giving not a hint that policymakers are starting to contemplate policy easing.

Financial conditions have eased in the last few months, and analysts have already expected the ECB not to risk easing them further by engaging in early rate cut talk. Germany's 10-year government bond yield, the benchmark for the euro area, was up one basis point (bp) at 2.34%, after hitting a fresh 2-month high at 2.371%.

Investors also watched U.S. data, which applied downward pressure to bond yields across the Atlantic. Germany's 2-year bond yield, which is sensitive to interest rate expectations, was down 1.5 bps at 2.69%.

Money markets recently scaled back their bets on an ECB move in March and April after strong economic data on both sides of the Atlantic and ECB officials' remarks pushing back against expectations for a quick monetary easing. "Today's decision to leave interest rates unchanged, and the tone of the press release, were as expected," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.

"It (the ECB statement) reiterates that interest rates need to remain at their current levels 'for a sufficiently long duration' and monetary policy will remain restrictive 'for as long as necessary'," he added. Investors priced in rate cuts for 130 bps in 2024 , roughly in line with the level seen before the ECB statement. They were discounting 150 bps in mid-January.

They kept pricing a 60% chance of a first 25 bps rate cut in April and an 85% chance of a 50 bps reduction by June. "The ECB appears to have walked back a bit and now could be questioning once again how well the transmission mechanism is working to the real economy," said Andrzej Szczepaniak, European economist at Nomura.

"This further supports our view that the ECB will be on hold for longer versus market expectations," he added.