Bund yields near six-month high ahead of US and Eurozone data

Bund yields near six-month high ahead of US and Eurozone data
Bund yields near six-month high ahead of US and Eurozone data

Benchmark euro zone bond yields fell slightly on Thursday after hitting a new six-month high early in the session, with investors taking a breather ahead of key economic data on both sides of the Atlantic.

Germany’s 10-year yield rose to its highest level in more than six months on Wednesday and Italian BTPs rose to 4% after German inflation rose slightly more than expected and a Federal Reserve official said that he did not rule out a rate increase.

Markets are awaiting US gross domestic product figures, due later on Thursday, followed by inflation data from Italy, France and the Eurozone, as well as the latest US consumer spending index (PCE) – the Federal Reserve’s preferred inflation indicator – Friday.

Data on Thursday showed Spain’s inflation rate rose to 3.8% in the 12 months through May, above the 3.7% average expected by analysts polled by Reuters.

Germany’s 10-year yield, the euro zone benchmark, fell one basis point (bps) to 2.67% after hitting its highest level since mid-November at 2.687 %.

Investors also focused on the European Central Bank’s (ECB) policy meeting next week, at which interest rates are expected to be cut by 25 basis points.

Money markets have priced in 58 basis points of ECB monetary easing in 2024, implying two rate cuts and a roughly 30% chance of a third measure by the end of the year.

“The ECB will not commit to a specific sequence of rate cuts and will remain entirely data dependent,” said Christoph Rieger, head of rates and credit research at Commerzbank.

“The rate cut will also not be described as monetary easing or normalization, but rather as a reduction in the degree of restriction,” he added.

The yield on two-year German government bonds, which is more sensitive to interest rate expectations, remained stable at 3.10%.

American economic activity continued to expand between the beginning of April and mid-May. However, businesses have become more pessimistic about the future due to falling consumer demand, while inflation has continued to rise at a modest pace, according to a US Fed survey.

“The Fed’s Beige Book didn’t attract much attention but supported the interest rate hike because it showed that the U.S. economy continued to grow even as businesses became somewhat more “pessimistic about the future,” said Karl Steiner, head of economic research at SEB, mentioning that the market is focused on U.S. data expected later in the session.

“A downward revision (of GDP) could give some breathing space to rising interest rates,” he added.

The Italian 10-year yield fell 1.5 basis points to 3.99%.

The yield spread between Italian and German bonds, a measure of the risk premium investors seek for holding bonds from the euro zone’s most indebted countries, narrowed slightly to 130 basis points. (Reporting by Stefano Rebaudo; Editing by Mark Heinrich)



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