Euro zone bonds tread water as markets await ECB and Lagarde

Euro zone bond yields were little changed on Thursday as investors waited for the European Central Bank meeting later in the day, when investors will tune in to President Christine Lagarde for hints about when interest rates might start to fall. Germany's 10-year bond yield, the benchmark borrowing cost for the euro zone, was last unchanged from Wednesday at 2.334%.

Euro zone bond yields were little changed on Thursday as investors waited for the European Central Bank meeting later in the day, when investors will tune in to President Christine Lagarde for hints about when interest rates might start to fall.

Germany's 10-year bond yield, the benchmark borrowing cost for the euro zone, was last unchanged from Wednesday at 2.334%. Yields move inversely to prices. Bond yields have risen in 2024 - with the German 10-year yield up 30 basis points (bps) - as investors have reined in their expectations for rapid and steep interest rate cuts, with economic data coming in stronger than expected and central bankers sticking to a tough line on inflation.

The ECB will set rates at 1315 GMT (2.15 p.m. CET) and Lagarde will hold a press conference at 1345 GMT. Economists and investors say the ECB is certain to leave rates at a record high of 4% but they will scrutinise Lagarde's comments and new economic projections, which are expected to downgrade inflation and growth forecasts for this year.

"The ECB's updated staff projections should take centre stage today after earlier sources said that HICP (inflation) projections are likely to be revised lower for 2024 and probably also 2025," said Hauke Siemssen, rates strategist at Commerzbank. Yet he added: "In view of the upside momentum in core inflation since the last meeting and the elevated wage risks ... Lagarde may strike a less dovish tone than in January."

Italy's 10-year bond yield was up 2 bps at 3.685% after a three-day slide helped take the closely watched spread over Germany's 10-year yield to its lowest since early 2022 at 130 bps. That gap widened a touch on Thursday to 134 bps. Yields cooled on Wednesday as investors took comfort from U.S. Federal Reserve chair Jerome Powell's balanced comments on inflation and interest rates. Powell said he still expected rate cuts in the coming months if inflation continued to drop.

Market pricing suggests investors expect both the ECB and the Fed to start cutting rates in June, with around 90 bps of cuts expected from both central banks this year. Germany's 2-year bond yield, which is sensitive to ECB rate expectations, was down 3 bps on Thursday at 2.845%.