Euro zone bond yields fall after Spanish inflation cools

Euro zone bond yields fell on Tuesday after data showed Spanish inflation slowed more than expected, euro zone economic sentiment deteriorated, and bank lending took a hit again.

Euro zone bond yields fell on Tuesday after data showed Spanish inflation slowed more than expected, euro zone economic sentiment deteriorated, and bank lending took a hit again. It followed a drop in government bond yields on Monday after U.S. Democrats and Republicans reached a deal on the debt ceiling on Friday. Yields move inversely to prices.

Germany's 10-year bond yield, the benchmark for the euro zone, was down 4 basis points (bps) at 2.392% on Tuesday as the weak data raised the possibility that the European Central Bank may raise interest rates less than previously expected. Yields fell 11 bps on Monday. The 2-year German yield, which is highly sensitive to interest rate expectations, was down 6 bps at 2.86% after falling 6 bps the previous day.

Spanish inflation slowed to 3.2% year-on-year in May, data on Tuesday showed. That was down from 4.1% in April and well below economists' expectations of a fall to 3.5%. Spain's 10-year bond yield was down 5 bps at 3.447%. The inflation data came a day after Spanish Prime Minister Pedro Sanchez called a snap election.

Adding to the downward pressure on yields was data showing that bank lending took another hit in April, which analysts said bolstered the case of ECB officials who are wary about raising interest rates too far. Shortly after, data showed that euro zone economic sentiment - based on surveys of businesses and consumers - fell more than expected in May.

Pooja Kumra, European rates strategist at TD, said markets were reversing last week's rise in yields, which had been driven by a stronger-than-expected U.S. inflation report. "Expectations of lower euro zone inflation this week are also making (their) way to euro bonds," Kumra said.

Euro zone inflation data for May is due on Thursday. It is expected to show that year-on-year inflation cooled to 6.3%, from 7% in April. However, Kumra said investors were still cautious ahead of Friday's key U.S. employment report, which could determine the outlook for Federal Reserve interest rates.

The debt ceiling deal will also be at the front of investors' minds as Democrat and Republican leaders try to get it through Congress this week. U.S. President Joe Biden appeared confident the bill to raise the $31.4 trillion debt limit would pass. "It feels good. We'll see when the vote starts," he told reporters.

Yields on U.S. Treasuries fell on Tuesday after markets were closed for a holiday on Monday. The benchmark 10-year yield was down 10 bps at 3.723%. Italy's 10-year yield was down 6 bps at 4.21%. The closely watched gap between German and Italian borrowing costs fell to 182 bps.

 

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