Euro zone bonds steady ahead of inflation data, Fed minutes

Figures from German states are expected to set the tone for bond markets, before euro zone data due on Friday. Germany's 10-year government bond yield, the euro area's benchmark, dropped three basis points (bp) to 2.03%, edging off a two-week intraday high of 2.11% hit the day before, when bonds sold off after their recent rally.

Euro zone bonds yields steadied on Wednesday after a few sessions of increases ahead of Federal Reserve meeting minutes later in the day and German inflation data on Thursday which are expected to offer clues about central banks' policy paths. Figures from German states are expected to set the tone for bond markets, before euro zone data due on Friday.

Germany's 10-year government bond yield, the euro area's benchmark, dropped three basis points (bp) to 2.03%, edging off a two-week intraday high of 2.11% hit the day before, when bonds sold off after their recent rally. The yield on the euro zone benchmark dropped by more than 40 basis points in December, moving, like European and U.S. peers, on expectations that central banks will be cutting rates significantly in 2024.

Money markets currently price in around 162 basis points (bps) of ECB rate cuts by year-end from around 165 bps at the end of 2023. Those expectations will be challenged or underscored by new information this week including U.S. jobs data - most importantly non farm payrolls on Friday - euro zone inflation data, and Wednesday's release of the minutes from the Fed's rate setting committee's December meeting.

"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 Padhraic Garvey, 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. At that meeting they held the policy interest rate steady, but issued projections showing most officials expect it would fall by at least three quarters of a percentage point in 2024 as inflation steadily declined to the Fed's 2% target.

U.S. Treasury yields were up in London trade, with the 10-year rising 4 bps to 3.98%, after hitting a 2-week high at 4.023% the day before, while U.S. traders lowered expectations for rate cuts in 2024 to 150 bps from more than 160 bps last week. Investors were also concerned about growing signs of geopolitical risks, which could impact supply chains and add to fresh inflation pressures.

Oil prices rose around 3% as reports of a disruption to Libya's top oilfield added to supply concerns emanating from tensions in the Red Sea. 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 1 bp to 3.73%. The gap between Italian and German yields was at 168 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. Italy's two year yield was steady at 3.03% and Germany's down 2 bps at 2.43%.

 

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