German 10 year yield set for biggest daily drop in a month after US CPI data

Germany's 10-year yield, the benchmark for the euro zone bloc, was last down 10 basis points at 2.44%, extending a decline ahead of the data, and putting it on track for its biggest daily drop since April 12. The U.S. consumer price index rose 0.3% last month after advancing 0.4% in March and February, the Labor Department's Bureau of Labor Statistics (BLS) said on Wednesday.

Euro zone bond yields dropped on Wednesday after U.S. consumer prices increased by less than expected in April, boosting expectations that the Federal Reserve will cut interest rates two times this year, and making larger ECB cuts easier too. Germany's 10-year yield, the benchmark for the euro zone bloc, was last down 10 basis points at 2.44%, extending a decline ahead of the data, and putting it on track for its biggest daily drop since April 12.

The U.S. consumer price index rose 0.3% last month after advancing 0.4% in March and February, the Labor Department's Bureau of Labor Statistics (BLS) said on Wednesday. Economists polled by Reuters had forecast the CPI gaining 0.4%. Euro zone yields are highly responsive to U.S. data given investor expectations that policy makers at the European Central Bank will not wish to cut rates substantially while the U.S. Federal Reserve remains on hold, and the global nature of some aspects of inflation.

An ECB rate cut in June is seen as highly likely - there have been repeated remarks from rate setters to this effect - but its path beyond that remains uncertain. Markets slightly increased expectations of the scale of ECB cuts this year after the U.S. data and are close to pricing in three 25 basis point cuts in 2024.

Investors increased their bets on Fed rate cuts after the inflation data and now fully price two rate cuts this year, likely beginning in September. "What the data does for the Fed is it establishes the first in what they are going to need to be a series of softer CPI reports for them to be able to cut later this year," said Jason Pride, chief of investment strategy and research at Glenmede.

"What it doesn't do is put the Fed on a trajectory to begin cutting immediately. They're going to need a couple more reports to get some confidence." The 10 year U.S. Treasury yield was last down 7 bps at 4.37%, its lowest in a month. The gap between the yields on the 10 year U.S. treasury and the 10 year German bund was last 193 basis points having narrowed after heading above 220 bps in late April when U.S. rate cuts seemed further away.

Italy's 10-year yield was lower by 15 bps at 3.75%.