Bund yield hits 5-month high as focus shifts to policy paths

Investors remained cautious ahead of the bloc's HCOB Purchasing Managers' Index (PMI), due on Tuesday, which can provide further clues about the ECB stance after the market scaled back bets on future monetary easing to less than 75 basis points last week. German 10-year bond yields, the benchmark for the euro zone, were up 2.5 bps at 2.53% after hitting 2.539%, their highest since end-November.

The euro area benchmark Bund yield hit a new 5-month high on Monday as fears of an escalation in the Middle East conflict receded and investors shifted their focus to inflation risks and the European Central Bank (ECB) monetary policy path. Investors remained cautious ahead of the bloc's HCOB Purchasing Managers' Index (PMI), due on Tuesday, which can provide further clues about the ECB stance after the market scaled back bets on future monetary easing to less than 75 basis points last week.

German 10-year bond yields, the benchmark for the euro zone, were up 2.5 bps at 2.53% after hitting 2.539%, their highest since end-November. Bond prices move inversely with yields.

"Against consensus, we expect a setback to business and consumer confidence survey due to the surge in oil prices, geopolitical tensions and tightening in global financial conditions," said Citi economists in a note to clients, after mentioning the PMIs, the Ifo survey on Wednesday as well as consumer confidence surveys and more national surveys. Fears of a broadening conflict in the Middle East triggered a rush into safe-haven assets which receded on Friday as Tehran said it had no plans for retaliation following an Israeli attack.

"The continuing uncertainty on underlying inflationary pressures in the euro zone may determine whether the ECB opts to proceed with greater caution on rate cuts after June," said Chief Analyst Frederik Romedahl at Danske Bank. "Our main scenario is that rate cuts will come at a 0.25 percentage points per quarter pace at the meetings in September, December and likewise in 2025. In our eyes, the risk is that the pace slackens," he added.

Recent comments from ECB officials made it clear that an interest rate cut is coming in June, but policymakers have continued to differ on moves thereafter. Money markets discounted 73 bps of ECB monetary easing in 2024, which implies two 25 bps rate cuts and an 90% chance of a third move by year-end. It was at 70 bps late on Friday.

The gap between Bund yield and 10-year U.S. yields -- a gauge of the monetary policy divergence between the U.S. and the euro zone – was at 212 after recently hitting 220.9 bps, its highest level since November 2019. Markets priced 39 bps of Fed rate cuts in 2024.

Italy's 10-year government bond yield, the benchmark for the euro area periphery, rose 0.5 bps at 3.91%.

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