Euro zone yields roughly unchanged after ECB signals rate cuts

"Today's ECB remarks do not change expectations for the policy path," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, confirming forecasts for 75 bps of cuts in the next 10-12 months. Germany's two-year bond yield, which is more sensitive to ECB rate expectations, hit 3.001% in early trading after rising 7 basis points (bps) in reaction to U.S. data on Wednesday.

Euro zone government bond yields were set to end the session roughly unchanged on Thursday as European Central Bank remarks left market expectations for a first rate cut in June and three additional moves during the year unchanged. The ECB held borrowing costs at a record high as expected and signalled it may soon cut interest rates while it would remain data dependent.

The German two-year yield hit its highest level since late November and markets scaled back their bets on ECB rate cuts to 75 basis points in 2024, after data showed on Wednesday that U.S. inflation was stronger than expected in March. "Today's ECB remarks do not change expectations for the policy path," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, confirming forecasts for 75 bps of cuts in the next 10-12 months.

Germany's two-year bond yield, which is more sensitive to ECB rate expectations, hit 3.001% in early trading after rising 7 basis points (bps) in reaction to U.S. data on Wednesday. It was last down 0.5 bps at 2.95%. The German 10-year bond yield was flat at 2.43%, after rising 6 bps on Wednesday. Bond yields move inversely to prices.

The U.S. figures cast doubts on whether the Federal Reserve will be able to cut rates this summer, and made investors temper their expectations for rate cuts from other central banks, given the importance of the U.S. to the global economy. Markets discounted just one Fed rate cut in 2024 in September after Wednesday’s data, according to implied yields of futures of CME federal funds.

"Inflation is falling, but not services. The ECB hopes that services do not begin to behave like the U.S., where services inflation rose yesterday," said Nick Chatters, fixed income investment manager at Aegon Asset Management. "Lagarde will not commit to a pre-defined path of rates, but the ECB is likely going to cut in June," he added.

Markets on Thursday were pricing in around 75 basis points of ECB cuts this year, and an about 80% chance of a first move by June. "An ECB more dovish than the Fed would weaken the euro... however I think the ECB will be able to cut rates in June even if the Fed should be expected to wait to take action," Allianz Global Investors' Maxia added.

Italian bonds underperformed their peers, with the 10-year yield up 2 bps at 3.79%. The closely watched gap between Italian and German 10-year borrowing costs stood at 135 bps. It reached 145 bps early this month, its highest level since early March, after hitting 115 in mid-March, its lowest in over 24 months.

 

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