Euro zone bonds steady as investors brace for frantic week

Euro zone government bond yields held steady at the beginning of the new week as investors looked towards the European Central Bank's interest rate decision on Thursday and U.S. employment figures on Friday.

Euro zone government bond yields held steady at the beginning of the new week as investors looked towards the European Central Bank's interest rate decision on Thursday and U.S. employment figures on Friday. Germany's 10-year bond yield, the benchmark for the euro area, was effectively unchanged from Friday's close at 2.409%, after creeping 5 basis points (bps) higher last week. Yields move inversely to prices.

The ECB is widely expected to leave interest rates at the current record high of 4%. But investors will listen for any hints from President Christine Lagarde on when borrowing costs might start to fall and look for clues in updated economic projections.

The detective work will continue on Friday when the United States releases jobs data for February, which will be scrutinised for indications about inflation and the potential path of Federal Reserve rates. Investors will be inundated with news in the interim. China's National People's Congress, where officials are set to unveil the economy's growth target for the year, will begin on Tuesday.

Super Tuesday, the biggest day in the U.S. presidential primary calendar, is likely to see Donald Trump cement his hold on the Republican nomination. Britain's finance minister will then lay out the government's spending and taxation plans on Wednesday, while seeking to avoid the ire of bond markets, and Fed Chair Jerome Powell will begin his semi-annual two-day testimony before Congress.

Italy's 10-year bond yield was down 2 bps at 3.863%. The closely watched spread between Italy and Germany's 10-year bonds traded at 143 bps, up from last week's two-year low of 139 bps. Yields have risen this year as traders tempered expectations for big and fast rate cuts as economies and inflation proved stronger than expected.

"We are not expecting any change from the ECB this week, but the market will look for any hints over the possibility of an April cut," said Mohit Kumar, chief Europe economist at Jefferies, in a research note. "We remain in the June rate cut camp both from the Fed and the ECB. Similarly, from Powell, we expect a push back on early rate cuts with the tone being that it's too early to declare victory over inflation."

Germany's 2-year bond yield, which is sensitive to ECB rate expectations, was last little changed at 2.882%. Data on Monday showed that investor morale in the euro zone improved for the fifth consecutive month in March, although economists warned of a "persistent" recession in Germany.