Euro Zone Bond Yields Slide as Investors Await Major Wage Data

Euro zone bond yields edged lower on Tuesday, with investors eagerly anticipating pivotal wage and growth data later in the week. With the German 10-year bond yield dropping 2.5 basis points to 2.508%, all eyes are on Thursday's wage figures and PMI data to gauge future ECB rate moves.

Euro zone bond yields were slightly lower but within their recent range on Tuesday as investors waited for wage and survey-based growth data later in the week to provide more clues on the path of interest rates. The German 10-year bond yield, the benchmark for the euro zone bloc, fell 2.5 basis points (bps) to 2.508%.

The yield, which moves inversely to the price, has risen from a one-month low of 2.398% touched last week as central bankers have said they remain cautious about cutting interest rates. A key focus for European investors this week is the release of first quarter negotiated wage figures for the euro zone on Thursday.

European Central Bank officials have long said they need to see slower increases in wages to be confident that inflation in the bloc is on a sustainable downward path. A closely watched survey-based gauge of the private sector - the purchasing managers' index (PMI) - will be released on Thursday and is expected to show growth continued in May.

"Several ECB speakers have recently indicated that a rate cut in June is highly likely, while ECB action thereafter will depend on future data," UniCredit strategists said in a note. "Euro zone PMIs and ECB negotiated wages, to be published on Thursday, might shed further light in this respect."

Italy's 10-year yield was down 1.5 bps at 3.804%, and the gap between Italian and German bond yields widened 1 bp to 129 bps. Germany's two-year bond yield, which is sensitive to ECB rate expectations, was 2 bps lower at 2.974%.

Markets see a June ECB cut as a near certainty but there is more doubt about what will follow. European bonds have often been driven by expectations about the Federal Reserve over the last two years, given the size and importance of the U.S. economy.

On Tuesday, two Fed policymakers said it was prudent for the central bank to wait longer to ensure inflation was back on the right path to the 2% target before commencing interest rate cuts. "I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy," influential Fed Governor Christopher Waller said.

Data on Tuesday showed that German producer prices fell more than expected in April, due mainly to lower energy prices. The spread between U.S. 10-year Treasuries and German bond yields was tighter by around 1 bp at 190 bps, down from an almost five-year high near 220 bps in April.