Euro zone bond yields dip, data shows wage growth slowed in Q4

Longer-dated yields had already slipped and inched lower after data showed that euro zone negotiated wage growth slowed to 4.5% in the fourth quarter, from a record 4.7% in the third. Germany's 10-year bond yield, the benchmark for the bloc, was last down 4 basis points (bps) at 2.37%.

Euro zone government bond yields eased from near multi-month highs on Tuesday as data showing cooling wage growth encouraged traders to nudge up bets on the number of European Central Bank rate cuts this year. Longer-dated yields had already slipped and inched lower after data showed that euro zone negotiated wage growth slowed to 4.5% in the fourth quarter, from a record 4.7% in the third.

Germany's 10-year bond yield, the benchmark for the bloc, was last down 4 basis points (bps) at 2.37%. Yields move inversely to prices. Bond market strategists said Tuesday's fall in yields came as investors paused for thought after sharply scaling back their expectations that central banks will slash interest rates this year.

"They (central banks) may not cut by May or April but I think there are cuts coming," said Pooja Kumra, senior European rates strategist at TD Securities. "We do have this bias for rate cuts coming back again." The benchmark German 10-year yield hit an almost three-month high of 2.422% on Friday.

"The markets have been erasing quite a lot of rate cut expectations this year - maybe it's enough for now," said Jussi Hiljanen, head of rates strategy at lender SEB. "I wouldn't be surprised if we make an attempt in the coming weeks at somewhat lower yields, unless the data points otherwise."

Germany's 2-year bond yield, which is sensitive to interest rate expectations, was last down 5 bps at 2.79%. Investors were expecting around 105 bps of cuts from the ECB this year on Tuesday, according to money market pricing, up slightly from around 102 bps on Monday.

Hiljanen said Tuesday's wage data didn't change the outlook significantly and that first-quarter 2024 readings would be more important. Some ECB policymakers, including President Christine Lagarde, have said they would like to see the outcome of wage deals struck in the first quarter before making a decision. That data is due in late May.

Italy's 10-year bond yield was last down 5 bps at 3.86%. It hit 3.986% last week, the highest mid-December. The closely watched gap between Italian and German 10-year yields narrowed slightly to 147 bps.