Euro zone government bond yields dip as focus turns to US inflation

The yield rose 15 bps last week after U.S. economic data came in stronger than expected and central bankers pushed back against investors' hopes for rapid interest rate cuts. Yet ECB Governing Council member and Bank of Italy chief Fabio Panetta said at a conference on Saturday that "the time for a reversal of the monetary policy stance is fast approaching", noting that inflation has fallen quickly and cutting rates late but aggressively could cause market volatility.

Euro zone bond yields fell slightly on Monday after rising sharply the previous week, as investors waited for Tuesday's U.S. inflation data and a number of central bank speakers.

Germany's 10-year bond yield, the benchmark for the bloc, was down 1 basis point (bp) at 2.373%. Yields move inversely to prices. The yield rose 15 bps last week after U.S. economic data came in stronger than expected and central bankers pushed back against investors' hopes for rapid interest rate cuts.

Yet ECB Governing Council member and Bank of Italy chief Fabio Panetta said at a conference on Saturday that "the time for a reversal of the monetary policy stance is fast approaching", noting that inflation has fallen quickly and cutting rates late but aggressively could cause market volatility. "The Panetta comments should be supportive, although he is well-known for his dovish attitude," said Rainer Guntermann, interest rate strategist at Commerzbank.

"It seems that there are also other factors at play, possibly like buying interest at year-to-date yield highs." In market terms, doves are central bank officials who favour lower interest rates while hawks prefer to keep them higher.

Germany's 2-year bond yield, which is sensitive to interest rate expectations, was down 1 bp at 2.715% after climbing 18 bps last week. "Rates are down today across major markets," said Emmanouil Karimalis, macro rates strategist at UBS. "I would say it is more of a correction given the big repricing we saw since last policy meetings.

"Inflation in the U.S. is set to decline further this week and rates might find some near-term support, unless inflation data surprise to the upside." U.S. consumer price index figures are due on Tuesday and are expected to show that headline inflation slowed to 3% year-on-year in January from 3.3% in December.

ECB Chief Economist Philip Lane and Bank of Spain Governor Pablo Hernandez de Cos are both due to speak on Monday, as is ECB board member Piero Cipollone. Italy's 10-year bond yield was last down 2 bps at 3.941% after climbing 16 bps the previous week.

The closely watched gap between Italy and Germany's 10-year bond yields tightened slightly to 156 bps. On Monday, traders who bet on the direction of interest rates were expecting 116 bps of cuts in 2024 from the ECB, up 2 bps from Friday but down sharply from the 145 bps expected at the start of February.

Strategists at UniCredit said Italy, Germany, France, Spain, Portugal and Greece are expected to sell a combined 37 billion euros ($39.87 billion) of bonds this week. But they said 42 billion euros of redemptions will likely see net supply turn negative for the first time this year. ($1 = 0.9280 euros)

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