Euro area bond yields drop after inflation data while awaiting the Fed

Euro zone yields fell on Monday after inflation data from Spain and Germany were roughly in line with expectations in a cautious market ahead of the Federal Reserve policy meeting. Since mid-April, markets have scaled back bets on European Central Bank rate cuts on the back of solid economic figures from the U.S. and are now waiting for further clues on the Federal Reserve policy path.

Euro zone yields fell on Monday after inflation data from Spain and Germany were roughly in line with expectations in a cautious market ahead of the Federal Reserve policy meeting.

Since mid-April, markets have scaled back bets on European Central Bank rate cuts on the back of solid economic figures from the U.S. and are now waiting for further clues on the Federal Reserve policy path. The euro area's fixed income market has tracked moves in U.S. Treasuries. The yield gap between Bund and 10-year Treasury - a gauge of the expected divergence between the ECB and the Fed policy paths – widened 2 bps to 209 bps. It hit 220.92 in mid-April, its highest since end-2019.

"Markets are likely to be in limbo ahead of the Federal Reserve meeting on Wednesday," Paul Donovan, chief economist at UBS Global Wealth Management, said. "On several measures, U.S. inflation could be considered already within the target range. With disinflation evident across market-driven prices, it seems clear that Fed policy has done what it was supposed to," he added.

Germany's 10-year government bond yields - the bloc's benchmark – dropped 5.5 bps to 2.52%. It hit 2.647% on Thursday, its highest level since the end of November. Markets last discounted 70 bps of ECB monetary easing in 2024 - which implies two 25 bps rate cuts and an 80% chance of a third move - from 65 bps late on Thursday. In mid-April it had been around 82 bps.

German data suggested that national inflation could slightly rebound this month, stopping its downward trajectory. Economists polled by Reuters forecast Germany's harmonised inflation rate at 2.3% in April, unchanged from March. Meanwhile, Spain's figures showed a 3.4% rise, slightly above the 3.3% expected by analysts polled by Reuters.

Spain's 10-year government bond yield dropped 4 bps to 3.33%. Spain's Prime Minister Pedro Sanchez said he had decided to stay on as prime minister after saying last week he was taking several days away from public duty to consider quitting.

Italy's 10-year bond yield, the benchmark for the euro area periphery, fell 5 bps to 3.84%. Germany's 2-year yields - more sensitive to policy rate expectations – dropped 3 bps to 2.96%.

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