Euro zone yields fell for the fourth consecutive session on Tuesday after investors increased their bets on interest rate cuts from the Federal Reserve and the European Central Bank this year, following weak data on the employment in the United States on Friday.
The yield on German 10-year bonds, the benchmark for the euro zone, fell 5.5 basis points (bps) to 2.418%, its lowest level since April 15.
Money markets have priced ECB rate cuts in 2024 at around 75 basis points, a level reached last week after US data. They discounted 45 basis points of monetary easing from the Fed, implying an 80% chance of a second reduction in 2024.
A string of positive data in the world’s largest economy had led investors to expect fewer than two Fed rate cuts this year, down from about seven at the start of 2024. Due to the importance of the economy In the United States, investors have also lowered their expectations of other major central banks.
“Little stands in the way of the gradual decline in yields,” said Christoph Rieger, head of rates and credit research at Commerzbank.
“The light (data) schedule … is unlikely to change the view that the U.S. economy is slowly losing steam.
The yield on 10-year Italian government bonds fell 3.5 basis points to 3.77%.
The spread between Italian and German 10-year yields – a measure of the risk premium investors demand for holding bonds from the euro zone’s most indebted countries – was up 4 basis points at 134.50 basis points after reaching 135.60, its highest level since April 26.
He briefly
touch
a new one-and-a-half month low at 120.20 on Monday.
Fitch
confirmed the BBB rating of Italian debt.
Preliminary data showed on Tuesday that orders for BTP-valore – a new retail bond that Italy is offering this week – were at 5 billion euros at 0940 GMT on the second day of the offering, down from 11.5 billion euros at the end of the second day of the February sale.
Retail investors have sustained demand for peripheral bonds for months as they raced for the most attractive yields in a decade. Bond prices move inversely to yields. The yield on German 2-year bonds, which is more sensitive to interest rate expectations, was down 1 bps at 2.904%.
Data on Tuesday showed German exports rebounded in March, supported by strong U.S. and Chinese demand, although a disappointing month for industrial orders indicated weakness in the economy persisted.
“We expect rising real wages and easing financial conditions to boost domestic demand in the coming quarters, with a rotation from services to goods,” said Christian Schulz, deputy chief European economist at Citi.
“However, we expect momentum to be dampened by fiscal normalization and the lagged effects of sharp monetary tightening,” he added.
ECB policymakers said on Monday they were increasingly confident about cutting interest rates as the economy returns to moderate growth and inflation appears to be under control.
Gross domestic product figures last week showed the euro zone economy grew 0.3% in the first quarter, after a slight recession. Eurozone inflation fell to 2.4% in April. (Reporting by Stefano Rebaudo and Harry Robertson; additional reporting by Sara Rossi; writing by Andrew Heavens, Mark Potter and Paul Simao)
