Euro zone yields set for weekly decline after central bank excitement

Euro zone bond yields were heading for a weekly decline on Friday having been reassured by a string of central bank meetings this week that interest rate cuts in several markets are likely to come in the summer.

Euro zone bond yields were heading for a weekly decline on Friday having been reassured by a string of central bank meetings this week that interest rate cuts in several markets are likely to come in the summer. Germany's 10-year bond yield, the euro zone benchmark, was down 2 basis points (bps), at 2.38%. It was on track for a weekly fall of 6 bps, and was trading around its lowest in a week.

Yields have been rising for much of 2024 as resilient economic data, particularly in the United States, caused traders to push back expectations of substantial interest rate cuts until the middle of 2024. But several central bank meetings this week saw markets became more confident that cuts would at least come by the middle of the year.

"A lot has happened, there have been a lot of central bank meetings, but if you take a step back we are much closer to the point where central banks want to and are going to start cutting, and we have had the first cut from the Swiss central bank," said Jamie Niven, senior fixed income fund manager at asset manager Candriam. The Federal Reserve on Wednesday kept rates steady but reiterated its projection that it would cut interest rates by 75 basis points by the end of the year, while on Thursday the Bank of England said the British economy was heading in the right direction for cuts, and in Switzerland, where inflation is lower, the Swiss National Bank surprised markets by cutting rates.

Markets see a roughly 80% chance that the European Central Bank and Federal Reserve will cut rates by their June meetings. Bundesbank President Joachim Nagel on Friday, added his name to a long list of policymakers suggesting, some quite firmly, that June was the date, saying the ECB might be in a position to cut interest rates before the summer recess, as inflation was on its ways back to the bank's 2% target,

Austrian central bank governor Robert Holzmann, who is seen by markets to be at the hawkish end of the ECB rate-setter spectrum, stayed out of the pack somewhat however, saying on Friday that inflation could well turn out to be stickier than those eying a June cut thought. Markets were also digesting a survey released on Friday showing German business morale improved in March and beat expectations, though probably not enough to prevent Europe's biggest economy from slipping into another recession.

Italy's 10-year yield was last flat on the day at 3.69% and set for a very small weekly fall. The closely watched spread between German and Italian yields was at 130 bps, holding not far from its two-year low hit last week. Rate sensitive two-year yields were also set for weekly declines. Germany's two-year yield was down 2 bps at 2.83% and set for a weekly drop of 8 bps, while Italy's two-year yield was flat at 3.43%, on track for a weekly 4 bps fall.