Euro zone bond yields steady as traders assess interest rate outlook

This week's fall in demand for safe assets pushed bond yields higher, while surprisingly strong U.S. retail data on Monday caused investors to further trim bets on Federal Reserve rate cuts this year, and by extension causing a slight reduction in European Central Bank (ECB) rate cut pricing. On Tuesday, top U.S. central bank officials, including Federal Reserve Chair Jerome Powell, backed away from providing guidance on when interest rates may be cut and said monetary policy needed to be restrictive for longer.

Euro zone bond yields paused for breath on Wednesday after this week's climb, trading near a 1-1/2-month high, as traders assessed central banks' possible next moves following robust U.S. data. This week's fall in demand for safe assets pushed bond yields higher, while surprisingly strong U.S. retail data on Monday caused investors to further trim bets on Federal Reserve rate cuts this year, and by extension causing a slight reduction in European Central Bank (ECB) rate cut pricing.

On Tuesday, top U.S. central bank officials, including Federal Reserve Chair Jerome Powell, backed away from providing guidance on when interest rates may be cut and said monetary policy needed to be restrictive for longer. On the same day, ECB President Christine Lagarde said the bank would cut rates soon, barring any major surprises, and argued the impact of geopolitical events on commodity prices had not been very significant so far.

Germany's 10-year bond yield, the benchmark for the euro zone, was last 0.2 basis point (bps) higher on the day at 2.48%, not far from its highest level since late February hit on Tuesday and recovering from Friday's tumble to 2.318% when investors snapped up safe assets as tensions between Israel and Iran ratcheted higher. Yields move inversely to prices.

The German 2-year bond yield, most sensitive to expectations for policy rates, was 2.3 bps higher at 2.95%, after briefly rising to an almost one-week high. Mohit Kumar, chief economist at Jefferies, said with U.S. economic data continuing to be strong and the market questioning whether the Fed needs to cut at all this year, central banks' rate decisions would be the main driver for markets.

"Despite the geopolitical risks in the background, we think that the rates market will likely drive all asset classes in the near term," he said. Analysts said investors will be watching for a slew of central banks speakers due later in the day, including Bank of England Governor Andrew Bailey.

Italy's 10-year bond yield was last 1.8 bps lower at 3.89%, after surging to its highest level since March 1 on Tuesday. Data on Wednesday confirmed euro zone inflation slowed across the board last month, reinforcing expectations for a ECB interest rate cut in June, even as rising energy costs and a weak euro currency cloud the outlook.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)