Euro zone yields retreat from peaks after bruising month

Euro zone yields dipped on Wednesday, edging back from peaks ​hit earlier in the week as markets turned more ​cautious on central bank rate hikes. But ‌bonds ​have endured a punishing month, with the French benchmark, for example, facing its biggest monthly rise in nearly four years.

Germany's 10-year yield, the euro zone benchmark, was down ‌4 basis points at 3.57%, edging away from the 3.65% that it hit on Monday, its highest point since 2009. Bond yields have surged this month as prices fell, pushed by soaring energy costs that are fanning inflation fears and the artificial intelligence ‌boom lifting economic growth, leaving investors to position for a period where interest rates stay higher for longer.

The German ‌10-year yield has risen 27 bps in September, while borrowing costs in countries that are viewed as less fiscally stable have risen more. France's has risen more than 60 bps, its biggest monthly jump since December 2022, though there have been some domestic political factors in play. Italy's 10-year ⁠yield has ​risen 43 bps this ⁠month.

But the mood was calmer on Wednesday, after energy prices fell on Tuesday, and as central bankers pushed back against market bets on rapid ⁠and sustained central bank rate increases. Some quarter-end rebalancing was also possibly in the mix. France's 10-year yield dropped 3 bps to 4.78% and ​Italy's dropped 6 bps to 4.57%.

In the US on Tuesday, Federal Reserve Bank of New York President ⁠John Williams said he thought the US central bank has time to weigh economic data before deciding when to hike interest rates again, causing traders ⁠to ​walk back bets on an October rate hike - though not completely, as they now see around a 50% chance of a move. Meanwhile, European Central Bank policymaker Peter Kazimir said the ECB, which has raised rates twice this year, ⁠had time to be flexible, making a broadly similar point to ECB chief Christine Lagarde on Monday.

That will face an ⁠immediate test, however, with CPI ⁠data from Germany, France and Italy all due Wednesday, followed by US PCE inflation later in the day. European 2-year yields, which are more sensitive to ECB policy, fell more than ‌10-year yields. Germany's ‌2-year yield dropped nearly 5 bps to 3.22%.