Euro zone government bond investors cautious ahead of inflation data, Fed minutes

The Federal Open Market Committee will issue minutes from its meeting of mid-December 2023 at 1900 GMT. Money markets priced in 161 basis points (bps) of ECB rate cuts by year-end, from 163 bps late on Wednesday.

Euro zone bonds were trading mixed on Wednesday ahead of German inflation data due on Thursday and the Federal Reserve’s minutes later in the day which could provide clues about the central bank policy path on both sides of the Atlantic. Figures from German states are expected to set the tone for bond markets, before euro zone data to be published on Friday.

Germany's 10-year government bond yield, the euro area's benchmark, dropped one basis point (bp) to 2.05%. U.S. Treasury yields were up in London trade, with the 10-year rising by 3 bps to 3.97%, after hitting a 2-week high at 4.023% the day before, while U.S. traders were lowering expectations for rate cuts in 2024 to 150 bps from more than 160 bps last week.

Markets are also awaiting U.S. jobs data on Thursday and Friday. "The job openings data will also be gleaned, but the bigger market impulse can come from the FOMC minutes, ones that will refer back to the pivotal 13 December meeting," said Garvey Padhraic, regional head of research Americas at ING.

"The odds are they won't be nearly as dovish as (Fed) Chair (Jerome) Powell was at the press conference," he added. The Federal Open Market Committee will issue minutes from its meeting of mid-December 2023 at 1900 GMT.

Money markets priced in 161 basis points (bps) of ECB rate cuts by year-end, from 163 bps late on Wednesday. They discounted around 165 bps at the end of 2023. Investors were also concerned about growing signs of geopolitical risks, which could impact supply chains and add to fresh inflation pressures.

Oil prices were little changed in Asian trade after sharp moves earlier in the week, as markets weighed concerns about the U.S. economy against potential supply disruptions. Iranian-backed Houthi militants in Yemen have stepped up attacks on vessels in the Red Sea to show their support for Palestinian Islamist group Hamas fighting Israel in Gaza.

Italy's 10-year government bond yield, the benchmark for the euro area periphery, rose 3 bps to 3.75%. The gap between Italian and German yields was at 167 bps after dropping below 160 bps last week.

A slower-than-expected ECB plan to reduce Pandemic Emergency Purchase Programme (PEPP) reinvestment, a European Union stability pact allowing more time to cut public debt and expectations for aggressive rate cuts, recently supported demand in Italian government bonds.