Euro zone bond yields steady, with focus on US Federal Reserve

Germany's 10-year bond yield, the benchmark for the euro zone, was last down 1.5 basis points (bps) at 2.433%. Yields have been rising for the past week after U.S. inflation data came in stronger than expected, causing investors to rein in their bets on Fed rate cuts, a continuation of the broad trajectory for much of 2024.

Euro zone bond yields held steady on Wednesday as traders scrutinised comments from European Central Bank policymakers and awaited the conclusion of the Federal Reserve meeting later in the day. Germany's 10-year bond yield, the benchmark for the euro zone, was last down 1.5 basis points (bps) at 2.433%.

Yields have been rising for the past week after U.S. inflation data came in stronger than expected, causing investors to rein in their bets on Fed rate cuts, a continuation of the broad trajectory for much of 2024. Most developed market bonds have been moving in near lockstep this year, meaning developments in the U.S. are important for euro zone bonds.

Germany's two-year yield, which is sensitive to European Central Bank interest rate expectations, rose 1 bp to 2.902% on Wednesday. Italy's 10-year yield, the benchmark for the euro zone periphery, was little changed at 3.709% as investors waited for the Fed.

Yields across bond markets fell in the morning after data showed British inflation cooled in February by slightly more than economists expected, a welcome sign that European inflation continues to slow. Yet yields rose steadily throughout the trading session, partly influenced by ECB officials trying to dampen investor bets on a streak of rate cuts.

"Even after the first rate cut, we cannot pre-commit to a particular rate path," ECB President Christine Lagarde said in Frankfurt. Her colleague Isabel Schnabel raised the prospect of a new era of structurally higher interest rates. The Federal Reserve's rate-setting committee concludes its two-day meeting later today and will release the latest "dot plot", setting out its expected rate path.

The focus will be on whether it trims the number of anticipated rate cuts this year to two 25 bp cuts, from the three projected in December. On Wednesday, traders were pricing in around 75 bps of Fed rate cuts this year, almost exactly in line with the December dot plot.

Meanwhile they were expecting roughly 85 bps of cuts for the ECB, according to prices in derivatives markets. "We still expect the Fed and the ECB to start cutting rates in June," said Michiel Tukker, senior European rates strategist at ING.

"Wage developments are the last hurdle (for the ECB), but by June the data for Q1 should be in and give enough confidence that the battle against inflation is headed in the right direction."

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