German Bund yield steady after biggest weekly drop in 12 weeks

Germany's 10-year bond yield was steady on Monday after last week suffering its biggest weekly fall since December, as mixed U.S. labour market data and central bank commentary left the door open for the ECB and Federal Reserve to cut rates in June. Germany's 10-year yield, the benchmark for the euro zone, was last down 0.5 basis points (bps) at 2.262%.

Germany's 10-year bond yield was steady on Monday after last week suffering its biggest weekly fall since December, as mixed U.S. labour market data and central bank commentary left the door open for the ECB and Federal Reserve to cut rates in June.

Germany's 10-year yield, the benchmark for the euro zone, was last down 0.5 basis points (bps) at 2.262%. It fell 14.5 bps last week, its biggest weekly drop in 12 weeks. Yields fell across the globe as both Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde signalled that June would be the likely starting point for their easing cycles.

"Rate cuts are arriving and that is going to be bullish for the front part of the yield curve," said Althea Spinozzi, head of fixed income strategy at Saxo Bank. Germany's two-year yield, which is sensitive to changes in policy rates, was last up 0.5 bps at 2.742%. Bond yields move inversely to prices.

Mixed U.S. labour market data on Friday supported those favouring easing to begin in the summer, with the economy adding more jobs than anticipated, but the unemployment rate rising and average hourly earnings increasing at a slower rate. "The employment report and recent Fed comments are consistent with our view that the Fed could start cutting rates in June," said Mohit Kumar, chief European economist at Jefferies.

"A further slowdown in inflation over the coming months should give enough confidence to the Fed that they can take their foot off the brakes." U.S. inflation numbers on Tuesday should provide more evidence that price pressures are fading, but with the Fed now in the blackout period before their March 19-20 meeting, there will be no commentary from policymakers.

In Europe, money market traders are also betting on the first ECB interest rate cut in June, while around 100 basis points of easing is priced this year, implying four quarter-point cuts in 2024. "The big question bondholders are asking themselves is whether a faster deceleration in inflation might lead the ECB to cut rates in April," said Saxo Bank's Spinozzi.

Elsewhere, Portuguese bonds were steady after Sunday's general election, which saw the centre-right Democratic Alliance (AD) win the most seats but fail to gain a majority, leaving it unclear if they can govern without the support of the far-right Chega. Portugal's 10-year government bond yield was last down 1 bp at 2.921%, keeping the spread between Portuguese and German 10-year yields steady at around 63 bps.

"We do not expect the election result to have much market impact after the recent upgrade," said Jens Peter Sørensen, director, fixed income research at Danske Bank, referring to S&P's sovereign upgrade which will allow Portugal's bonds to be included in more bond indices. "This should be positive for PGBs but also other peripherals that are next in line such as Spain that are up for review on Friday by Moody's," Sørensen said.

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