Eurozone Bond Yields See Volatile Shifts Amid U.S. Inflation Data

Eurozone bond yields reacted to unexpected drops in U.S. producer prices. German, Italian, and French yields experienced significant fluctuations as investors balanced weak U.S. consumer inflation data against the Federal Reserve's revised interest rate projections. Central banks, including the ECB, are expected to ease monetary policies cautiously amidst ongoing inflation concerns.

Reuters | Updated: 13-06-2024 19:29 IST | Created: 13-06-2024 19:29 IST
Eurozone Bond Yields See Volatile Shifts Amid U.S. Inflation Data
AI Generated Representative Image

German government bond yields fell while Italian and French borrowing costs pared gains after

U.S. data showed an unexpected drop in producer prices, supporting expectations that central banks will ease their monetary policy.

The euro zone's borrowing costs were edging up right before the U.S. figures with investors balancing recent weak U.S. consumer price inflation data against Federal Reserve policymakers' median projection, which now sees only one interest rate cut this year, down from three in March. Yields in the bloc recorded their biggest daily fall since mid-May on Wednesday after economic data showed U.S. inflation was softer than expected.

Money markets priced in 38 bps of further European Central Bank rate cuts in 2024, implying a second cut fully priced in and a roughly 50% chance of a third this year . They discounted 49 bps of Fed cuts from 44 bps before data. "We expect continued good readings on inflation to enable the Fed to start cutting then, but the risk continues to be that the disinflation path is bumpy," said Xiao Cui, senior economist at Pictet Wealth Management, referring to the outcome of the Fed policy meeting.

Germany's 10-year yield, the benchmark for the euro area, fell 2 basis points (bps) to 2.52%. It hit 2.707% at the end of May, its highest level since mid-November. The spread between French and German yields - a gauge of the risk premium investors demand to hold French government bonds - was close to its highest level in around 15 months after French President Emmanuel Macron urged rival parties on Wednesday to join his electoral alliance against Marine Le Pen's far-right National Rally.

French financial assets are saddled with political uncertainty and investor fears that a far-right government, if it wins power in the upcoming snap parliamentary election, could worsen France's long-term fiscal sustainability. The French spread widened to 65.5 bps; it hit 66.9 earlier this week, its widest level since March 2023. OATs 10-year yield rose 1.5 bps to 3.17%.

Gains by the far right in voting for the European Parliament on Sunday may complicate European Union attempts to deepen integration, increasing the risk premium investors demand to hold bonds of the most indebted countries. Italy's 10-year yield rose one bp to 3.93%, with the gap between Italian and German yields widening 5 bps to 142 bps.

Germany's 2-year government bond yield, more sensitive to policy rate expectations, was down 3 bps at 2.94%. In the euro zone, ECB policymakers have recently sounded cautious about the disinflation process. ECB vice-president Luis de Guindos said the central bank must move "very slowly" in reducing rates, and chief economist Philip Lane argued the ECB should wait with its next cut until uncertainty recedes.

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

Give Feedback