Euro zone yields edge lower, eyes on US Federal Reserve

Euro zone bond yields ticked lower on Wednesday as traders eyed events beyond the currency bloc, digesting slightly lower-than-expected British inflation data and awaiting the conclusion of the Federal Reserve meeting later in the day.

Euro zone bond yields ticked lower on Wednesday as traders eyed events beyond the currency bloc, digesting slightly lower-than-expected British inflation data and awaiting the conclusion of the Federal Reserve meeting later in the day. Germany's 10-year bond yield, the benchmark for the euro zone, was last down 3 basis points at 2.42%.

The small decline marked a reversal of the recent trend. Yields have been rising for the past week as U.S. economic data remained strong causing investors to rein in bets on Federal Reserve rate cuts, a continuation of the broad trajectory for much of 2024. Most developed market bonds have been moving in near lockstep this year, meaning developments in the U.S. are important for euro zone bonds.

The Federal Reserve's rate-setting committee concludes its two-day meeting later today. "There are three things to watch for at the Federal Open Market Committee - dot plots, (Chair Jerome Powell's) tone on inflation and confidence in cutting rates and quantitative tightening," said Mohit Kumar, chief European economist, at Jefferies.

The Federal Reserve will release its latest "dot plot" on Wednesday, setting out its expected rate path. The focus will be on whether it trims the number of anticipated rate cuts this year to two 25 basis point cuts, from the three projected in December. "I expect Powell's tone to remain consistent with the view that they are getting closer to the stage of cutting, but need to see more data," said Kumar. "On quantitative tightening, I expect lots of discussion, but see a quantitative QT reduction more of a June story."

In the euro zone, hints, some explicit, from policy makers have led markets to expect the first European Central Bank rate cut in June. That means the debate is starting to shift to how quickly they will cut rates at subsequent meetings and how often. ECB President Christine Lagarde appeared to try to dampen such speculation on Wednesday, saying the ECB's decisions will remain data dependent and meeting-by-meeting.

"This implies that, even after the first rate cut, we cannot pre-commit to a particular rate path," she told a conference in Frankfurt. Also in the mix on Wednesday was data showing British inflation cooled in February by slightly more than economists and the Bank of England expected.

That could give the central bank more confidence that it can cut interest rate cuts in the coming months, and British government bond yields outperformed peers with the 10-year gilt yield touching a one-week low. The BoE, as well as the Swiss and Norwegian central banks meet Thursday, though are not expected to change rates.

Germany's two-year yield dipped 1 bp to 2.88%. Italy's 10-year yield, the benchmark for the euro zone periphery was down 2 bps at 3.70%.