Euro zone yields hover near lowest levels in months ahead of ECB

Comments from ECB officials this week saying inflation was probably close to its peak have bolstered expectations that the central bank is likely to slow its pace of interest rate increases to 50 bps, from 75 bps previously, at its Dec. 15 meeting. Germany's 10-year bond yield seen as the benchmark for the bloc, was roughly flat at 1.786%, just above a two-month low of 1.753% hit the previous day.

Euro zone government bond yields held steady near their lowest levels in months on Thursday, as investors looked toward the European Central Bank's (ECB) policy meeting next week. Comments from ECB officials this week saying inflation was probably close to its peak have bolstered expectations that the central bank is likely to slow its pace of interest rate increases to 50 bps, from 75 bps previously, at its Dec. 15 meeting.

Germany's 10-year bond yield seen as the benchmark for the bloc, was roughly flat at 1.786%, just above a two-month low of 1.753% hit the previous day. A sharp slowdown in inflation in the United States in October and the euro zone in November has encouraged investors to believe the worst may be over in terms of price pressures, causing global yields to drop sharply in recent weeks.

"At the year-end you have some investors finally using their cash to invest," said Patrick Barbe, head of European investment grade fixed income at Neuberger Berman. Yet many investors say the sharp drop in euro zone yields has gone too far, given that inflation is still running at 10% year on year and that the ECB is set to raise rates to at least 2% next week.

"We are still at a very high level of inflation in the euro zone," said Camille de Courcel, head of European rates strategy at BNP Paribas Markets. De Courcel said she expected a 50 bp rate hike from the ECB next week, but said there "is still a risk that they deliver a 75".

Germany's 2-year yield was marginally lower at 2.014%. With the economic calendar looking thin, investors will be keeping an eye on a pre-recorded speech by ECB President Christine Lagarde to a financial conference, expected at 1200 GMT.

Slovak central bank chief and ECB official Peter Kazimir told Bloomberg on Wednesday that it "wouldn't be right to slow down the monetary tightening" with inflation still high. Italy's 10-year yield was 2 bps higher at 3.629%, having fallen to its lowest level since late August on Wednesday at 3.584%.

The gap between Germany and Italy's 10-year yields stood at 183 bps, close to its tightest level since late April. Investors are scrutinising global economic data as the ECB, U.S. Federal Reserve and Bank of England prepare for interest rate decisions next week.

An ECB survey on Wednesday showed euro zone consumer expectations for inflation picked up in October. Yet labour productivity data out of the U.S. suggested that employment cost pressures were cooling, contributing to a sharp drop in the U.S. 10-year yield on Wednesday. It stood at 3.446% on Thursday.

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