German bond yields hit four-month low before inflation data

A sharp slowdown inflation has investors betting that the next move in central bank interest rates will be down. Germany's 10-year bond yield was on track for its biggest monthly drop since July 2022 in November, at 40 bps, signifying a strong rally in prices.

Euro zone bond yields fell marginally on Thursday morning to new multi-month lows as investors waited for the latest inflation data from the single currency bloc.

The yield on Germany's 10-year bond, the benchmark for the bloc, fell 2 basis points (bps) to 2.394% in early trading, the lowest since late July. It was last at 2.415%. France's 10-year bond yield was last down 1 bp at 2.987% after data showed that inflation in the country cooled more than expected in November. Yields move inversely to prices.

Euro zone-wide inflation figures for November are due at 1000 GMT (11 a.m. CET). Economists polled by Reuters expect year-on-year inflation cooled to 2.7% in November from 2.9% in October. U.S. and European bond yields have tumbled since hitting their highest levels in more than a decade in October. A sharp slowdown inflation has investors betting that the next move in central bank interest rates will be down.

Germany's 10-year bond yield was on track for its biggest monthly drop since July 2022 in November, at 40 bps, signifying a strong rally in prices. An index of European government bonds has risen 3.2% in November, in the biggest monthly rise in a year and a half.

Data on Wednesday showed that German and Spanish inflation fell more than expected in November. "They point to a larger-than-expected drop in today's euro zone flash estimate," said Benjamin Schroeder, senior rates strategist at ING, in an note to clients. "For the European Central Bank that means 2024 could bring a first rate cut."

Germany's 2-year bond yield, which is sensitive to ECB interest rate expectations, was last down 3 bps at 2.791%, its lowest since early June. Italy's 10-year bond yield was down 1 bp at 4.174%, around its lowest since early September.