Euro zone bond yields back at multi-month lows after US jobless claims

Euro zone bond yields dropped on Thursday, resuming their broad downward trend after softer than forecast U.S. jobless claims data fed expectations that major central banks are done raising interest rates after .

Euro zone bond yields dropped on Thursday, resuming their broad downward trend after softer than forecast U.S. jobless claims data fed expectations that major central banks are done raising interest rates after . Germany's 10-year bond yield fell around 7 basis points (bps) to 2.56%, its lowest since Sept. 4.

The Bund yield, the euro zone benchmark, briefly nudged above 3% in early October but has dropped fairly steadily since, as economic data showed U.S. inflation was slowing and as inflation and economic growth have slowed in Europe. Slowing inflation could allow central banks around the world to stop hiking interest rates, and the latest encouraging signal was cooler-than-forecast U.S. CPI data on Tuesday. After that, the Bund yield dropped 11 bps and the U.S. 10-year Treasury yield fell nearly 20 bps.

Yields ticked up a touch on Wednesday after Tuesday's sharp bond rally, and as data showed U.S. retail sales declined less than expected. Yields moved lower again on Thursday after data showed the number of Americans filing claims for new unemployment benefits increased to a three-month high last week.

"The European sovereign market is just trading based on whatever is happening with U.S. Treasuries," said Althea Spinozzi, fixed income strategist at SaxoBank. Chris Beauchamp, chief market analyst at IG in London, said the jobless claims data was "another sign of a cooling in the U.S. economy, and a further brick in the wall of expectations that the Fed is now on pause for the foreseeable future."

Investors are also watching political developments, a day after the German government froze major spending pledges focused on green initiatives and industry support after a constitutional court ruling on unused pandemic emergency funds blew a 60 billion euro ($65 billion) hole in its finances. "This would imply slightly less (bond) issuance in 2024, but we think the market impact would be marginal," said Mohit Kumar chief economist Europe at Jefferies said in a note to clients.

In Spain, parliament voted to make Pedro Sanchez prime minister for another term, ending a protracted deadlock after an inconclusive general election in July. The spread between German and Spanish 10-year yields narrowed around 2.5 bps to 99 bps.

The spread between Germany and Italy, the benchmark for the European periphery, has also been narrowing and is not far from its narrowest since mid-September at 175 bps, around 4 bps narrower on the day. Italy's 10-year bond yield was down 10.5 bps to 4.333%, its lowest level in 2 months, before a scheduled review from Moody's on the country's 'Baa3' sovereign rating after the market closes on Friday.

Germany's two-year yield fell 7 bps to 2.943% and Italy's dropped 9.5 bps to 3.571%.