Euro zone bond yields fall after two-day jump

Euro zone bond yields fell on Tuesday as fixed income markets found a foothold after the biggest two-day sell-off in almost a year. The closely watched spread between Italian and German 10-year debt slipped to 154.8 bps. Fixed income investors were focused on new issuance on Tuesday, with little major economic data on the calendar.

Euro zone bond yields fell on Tuesday as fixed income markets found a foothold after the biggest two-day sell-off in almost a year. Germany's 10-year bond yield, the benchmark for the euro zone, was down 4 basis points (bps) at 2.28%.

The yield rose 18 basis points over the previous two sessions in its biggest two-day rise since March 2023, dragged higher by soaring yields on all-important U.S. Treasuries. U.S. jobs data handily beat expectations on Friday and Federal Reserve Chair Jerome Powell said in an interview published on Sunday that the central bank would take its time in reducing interest rates.

A stronger-than-expected survey on the U.S. services sector added to the upward pressure on yields as investors further reined in their expectations of a March cut from the Fed. "The jury is still out on whether this (rise in yields) is another welcome correction in the broader bond bull market, or whether it could lead to another trend reversal in yields, similar to last year," said Christoph Rieger, head of rates and credit research at Commerzbank.

Germany's 2-year bond yield, which is sensitive to European Central Bank rate expectations, was down 3.7 bps at 2.58% after rising 20 bps in the previous two sessions. Survey data from the European Central Bank on Tuesday showed euro zone consumers trimmed their expectations for inflation over the next 12 months in December, to 3.2% from 3.5% in November.

Yet they slightly increased their expectations for inflation three years ahead, to 2.5% from 2.4%. Italy's 10-year yield was 5.3 bps lower at 3.84%. The closely watched spread between Italian and German 10-year debt slipped to 154.8 bps.

Fixed income investors were focused on new issuance on Tuesday, with little major economic data on the calendar. Spain received strong demand for a sale of a new 30-year bond, while Belgium and Austria also sold debt. The U.S. will auction $54 billion of three-year notes, ahead of the sale of 10-year and 30-year bonds in the next two days.

Investors now expect around 125 bps of interest rate cuts from the ECB this year, according to money market prices. That was little changed from Monday but down from 140 bps a week ago.

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