Euro Zone Bond Yields Shift as ECB and Fed Policies Diverge

Euro area benchmark Bund yields decreased from recent highs with an eye on upcoming ECB data and PMI releases. UK inflation influences predictions of ECB rate cuts in 2024. Federal Reserve minutes revealed concerns about recent inflation results. Divergence between ECB and Fed policy paths grows.

Euro area benchmark Bund yields edged down from three-week highs ahead of the European Central Bank wage tracker and Purchasing Managers' Index (PMI) data which could affect the monetary policy path. Wednesday's inflation figures from the UK led investors to discount less than 65 basis points (bps) of ECB rate cuts in 2024 for the first time this year. Federal Reserve minutes showed policymakers acknowledged disappointment over recent inflation readings.

Money markets last priced in 63 bps of ECB rate cuts in 2024 . Germany's 10-year yields, the bloc's benchmark, dropped 0.5 bps to 2.53%, after hitting on Wednesday 2.556%, its highest level since May 2.

Italy's 10-year yield fell one bp to 3.82%, while the yield gap between Italian and German bonds -- a gauge of the risk premium investors seek to hold bonds of the euro area's most indebted countries -- tightened slightly to 128 bps. Germany's 2-year government bond yield, more sensitive to policy rate expectations, was up one bp at 3.02%, after hitting on Wednesday 3.023%, its highest since May 2.

The spread between U.S. 10-year Treasuries and German bunds -- a gauge of the expected policy path divergence between the ECB and the Fed -- widened one bp to 189 bps.

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