Euro Zone Bond Yields Rise Amid Key Inflation Data Anticipation

Euro zone bond yields inched up ahead of significant inflation data from Europe and the U.S. this week. Analysts predict additional ECB rate cuts. German and Italian bond yields showed slight increases, reflecting market anticipation for monetary policy updates. ECB policymakers remain poised for further easing if inflation data surprises.

Euro zone bond yields edged up on Tuesday before key inflation data from Europe and the United States this week that could help determine how much the European Central Bank and Federal Reserve lower borrowing costs this year. First up are German consumer prices data on Wednesday, then euro area-wide figures and U.S. personal consumption expenditure data, the Fed's targeted inflation measure, on Friday.

Analysts do not expect a meaningful upside surprise in euro area inflation to dissuade the ECB from cutting interest rates when they announce policy on June 6. "What can keep the ECB from cutting rates next week? The answer is only 'major surprises'," said Christoph Rieger, head of rates & credit research at Commerzbank.

"Even an unrealistic jump in this week's inflation releases would probably not be sufficient." Economists surveyed by Reuters expect the euro area's harmonised index of consumer prices to tick up to 2.5% from 2.4%, while core measures are seen holding steady.

Money market traders are almost fully pricing a rate cut next week and around 60 basis points of monetary easing by year-end, implying at least two quarter-point rate cuts, with around a 40% chance of a third. "It's not necessarily what the ECB does next week," said Peter Schaffrik, global macro strategist at RBC.

"It's how they lay the groundwork for whatever comes afterwards," Schaffrik added, noting that they expect three rate cuts in 2024. French central bank chief Francois Villeroy de Galhau on Monday refused to rule out a second rate cut at the ECB's July meeting, saying the debate about how fast and far to keep easing after June remains open.

Other policymakers, including ECB chief economist Philip Lane, took a more measured stance but still warned that easing too late could risk pushing inflation below target. Yields in Europe dipped on Monday following the comments but have recovered somewhat on Tuesday.

Germany's 10-year yield, the euro area's benchmark, was up 3.6 basis points (bps) at 2.582%. On Monday, it fell 3.5 bps. Germany's two-year bond yield, which is more sensitive to changes in ECB rate expectations, was up 2 bps at 3.058%, having fallen almost 5 bps on Monday. It hit 3.124% on Friday, its highest since mid-November.

Data on Tuesday was light, although an ECB survey showed euro zone consumers lowered their inflation expectations last month. Italy's 10-year yield was higher by 6.2 bps​ at 3.895%, and the gap between Italian and German bunds widened by 3.25 bps to 130.4 bps.