Euro zone bond yields steady after recent climb

Euro zone government long-dated bond yields paused on Wednesday, taking a break from this year's climb, as traders kept an eye on remarks by European Central Bank policy makers for clues on how soon they will start cutting interest rates.

Eurozone government long-dated bond yields paused on Wednesday, taking a break from this year's climb, as traders kept an eye on remarks by European Central Bank policymakers for clues on how soon they will start cutting interest rates. Germany's 10-year bond yield was last flat on the day at 2.19%.

The eurozone benchmark yield dropped around 80 bps in November and December but has risen more than 15 bps in January, as traders first moved to price in significant rate cuts in Europe and the United States in 2024 on the back of slowing inflation, and then, this year, reassessed those calls. Market pricing now reflects around a 40% chance of the European Central Bank cutting interest rates in March.

Such a move was fully priced in late December, but a sense that pricing had gone too far, combined with stronger-than-expected employment data in Europe and the United States, has caused traders to reassess. A deluge of supply has also weighed on bond prices, which move inversely to yields, though so far investors seem willing to absorb the new issuance.

On Wednesday, Spain was set to raise 15 billion euros from a 10-year bond sale, seeing 137 billion euros ($142.36 billion) of investor demand, Reuters reported citing a memo from a lead manager, the highest level ever. This week's main event that could cause a major reassessment of the timing of interest rate cuts is U.S. consumer inflation data due Thursday, and markets are in a holding pattern until then.

"Today's data calendar is certainly only sparsely stocked. The sole item which is of greater interest (is) French industrial production readings for November," said analysts at DZ Bank in a morning note to clients. That data showed a 0.5% month-on-month increase in industrial production.

DZ bank added remarks from several ECB policymakers would be "also of interest". ECB executive board member Isabel Schnabel, seen as the most influential voice in the conservative camp of policymakers, will conduct an online Q&A at 14.00 GMT. Remarks by Schnabel to Reuters in early December contributed to markets bringing forward expectations of rate cuts.

ECB Vice President Luis de Guindos said earlier on Wednesday that the slowdown in euro zone inflation is likely to pause at the beginning of the year. Italy's 10-year yield dipped 3 bps to 3.82%. Like its German peer, it has rebounded a touch in 2024 having tumbled to leave the gap between the German and Italian yields at 162 bps.

Shorter-dated bond yields ticked up a fraction, causing curves to become slightly more inverted. Germany's two-year yield touched a one-month high and was last up 2 bps at 2.63%.

Meanwhile, trade body ICMA said on Wednesday that central banks must intervene more frequently in government bond markets.