Euro zone bond yields steady ahead of US inflation data

Euro zone bond yields steadied on Tuesday, after last week posting their biggest weekly fall since December, as investors waited for U.S. inflation data that could firm expectations for a summer Federal Reserve rate cut. Germany's 10-year yield, the benchmark for the euro zone, was 0.8 basis points (bps) lower at 2.29% at 0930 GMT.

Euro zone bond yields steadied on Tuesday, after last week posting their biggest weekly fall since December, as investors waited for U.S. inflation data that could firm expectations for a summer Federal Reserve rate cut. Germany's 10-year yield, the benchmark for the euro zone, was 0.8 basis points (bps) lower at 2.29% at 0930 GMT. It fell 14.5 bps last week, its biggest weekly drop in 12 weeks, to hit 2.233% on Friday, its lowest since Feb. 2.

Bond yields move inversely to prices. Yields have come under pressure as both European Central Bank (ECB) President Christine Lagarde and Federal Reserve Chair Jerome Powell signalled that they could start cutting rates in June. Mixed U.S. labour market data on Friday also supported that view.

U.S. inflation data due later in the day is expected to show a monthly increase of 0.4% in February and 3.1% on an annual basis. Core consumer prices are seen rising 0.3%, which would nudge the annual pace down to 3.7%. "Market is in a wait and watch mode for the CPI print today, which should set the tone for the markets over the coming weeks," said Mohit Kumar, Chief Economist and Strategist for Europe at Jefferies, adding he expects a first Fed cut in June, in line with markets.

"Today's CPI print will be an important marker for that timeframe. An inline or weaker print would reinforce our view of the June cut and be welcomed by the markets." Markets are not pricing in a Fed cut at next week's meeting but a more than 60% chance of one in June, the CME FedWatch Tool showed.

"The important point for investors is not when they start but how deep they and other central banks go," said Will Hobbs, Head of UK Multi-Asset Wealth, Barclays Private Bank & Wealth Management. "Will we return to the basement levels seen last economic cycle or is a new normal in store?"

Germany's two-year yield, which is sensitive to changes in policy rates, rose 1 bp to 2.77%. Italy's 10-year government bond yield was 2.2 bps lower at 3.60%. The spread over Germany's 10-year yield - a gauge of the risk premium investors ask to hold bonds of the euro area's most indebted countries - stood at 130 bps. It hit 128.4 bps the day before, its narrowest since January 2022.