Bond Market Reacts to U.S. Data with Yield Drops and Political Jitters

German government bond yields fell after U.S. data showed a drop in producer prices, influencing expectations of central bank policy easing. Political concerns raised risk premiums on French and Italian bonds. The Federal Reserve's latest projections suggest a limited number of rate cuts this year, impacting market pricing.


Reuters | Updated: 13-06-2024 21:24 IST | Created: 13-06-2024 21:24 IST
Bond Market Reacts to U.S. Data with Yield Drops and Political Jitters
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German government bond yields fell on Thursday after U.S. data showed an unexpected drop in producer prices, supporting expectations that central banks will ease monetary policy, but the risk premium on French bonds widened to the highest since early 2023. Data showed U.S. producer prices fell 0.2% last month, below analysts' forecast of a rise of 0.1%. Separate figures showed U.S weekly jobless claims rose to a 10-month high, suggesting the labour market is cooling.

Yields in the euro zone recorded their biggest daily fall since mid-May on Wednesday after economic data showed U.S. inflation was softer than expected. However, they rose in the morning session on Thursday after new forecasts showed Federal Reserve policymakers' median projection is now for only one interest rate cut this year, down from three in March. Germany's 10-year yield, the benchmark for the euro area, was last down 2 basis points (bps) to 2.513%. It hit 2.707% at the end of May, its highest level since mid-November.

"As we heard in the recent press conference, the Federal Reserve saw modest progress with inflation dynamics and we expect future inflation reports will solidify their view," said Jeffrey Roach, chief economist for LPL Financial. "Given the macro landscape, the Fed will likely begin cutting rates later this year."

Politics-driven jitters about euro zone bonds continued on Thursday, with the premium investors demand to hold French debt over German bonds rising sharply. The spread between French and German yields climbed to 69 bps, according to LSEG data, the highest since March 2023. The French 10-year yield was last up 4 bps to 3.195%.

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. French President Emmanuel Macron urged rival parties on Wednesday to join his electoral alliance against Marine Le Pen's far-right National Rally.

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. Italian bonds have also been hit by risk-aversion among investors. Italy's 10-year yield were last up 5 bps to 3.97%, with the gap between Italian and German yields widening 8 bps to 145 bps.

Germany's 2-year government bond yield, more sensitive to policy rate expectations, was down 5 bps at 2.918%. 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.

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

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