Euro area yields end the week up, markets scale back bets on ECB rate cuts

Euro area bond yields were on track to end the week higher as solid U.S. economic data, hawkish remarks from Federal Reserve officials, and a jump in oil prices led investors to scale back some bets on European Central Bank rate cuts.

Euro area bond yields were on track to end the week higher as solid U.S. economic data, hawkish remarks from Federal Reserve officials, and a jump in oil prices led investors to scale back some bets on European Central Bank rate cuts. Money markets priced in 86 basis points (bps) of ECB rate cuts this year from 93 bps early this week while still fully pricing a first 25 bps move by June.

Data out on Friday showed that U.S. employers hired far more workers than expected in March, suggesting the U.S. central bank might delay its monetary easing. "The Federal Reserve's dashboard still has some warning lights to deal with before signalling the all-clear for cutting," Sophie Lund-Yates, lead analyst at Hargreaves Lansdown, said following the data.

The dominance of the U.S. economy and the similar path of inflation across the two economic zones means U.S. data and bonds tend to influence their euro zone peers. Germany's 10-year government bond yield, the benchmark for the bloc, was 4.5 bps higher at 2.40%, after being up 1.5 bps before the U.S. data was released. It was set to end the week 11 bps higher.

The U.S. 10-year yield advanced 7 bps to 4.38% . "What is clear is market rates have not fallen by anything near what would have been typically expected from a 'Fed peak moment'," said Padhraic Garvey, regional head of research, Americas at ING.

"Firm labour market data and pops in inflation data have muddied the water. And the latest payrolls report largely contains more of the same." The Fed policy peaked in July 2023, when the U.S. central set the benchmark overnight rate at 5.25%-5.50%.

Atlanta Fed President Raphael Bostic said on Wednesday the Fed should reduce rates only once in 2024, while Minneapolis Bank President Neel Kashkari said on Thursday that if inflation continues to stall, no rate cuts may be required by year end. Germany's two-year bond yield, anchored to ECB rate expectations, was last up 1.5 bps at 2.87% and on track to end the week 5 bps higher.

Euro zone inflation unexpectedly fell last month, solidifying the case for the ECB to start lowering borrowing costs from record highs. Some analysts fear that a further jump in oil prices could threaten the disinflation process, which is well underway.

Crude prices were on course for a second weekly gain, supported by geopolitical tensions in the Middle East, concerns over tightening supply and expectations about demand growth. Italy's 10-year bond yield rose 7.5 bps from Thursday to around 3.79%. The spread over Germany's 10-year yield – a gauge of risk premium investors seek to invest in government bonds of the euro area's most indebted countries - widened 4 bps to 138 bps. In March it hit 115 bps, the lowest in more than two years..

 

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)