Euro zone government bond yields fell on Tuesday as weak economic data and falling oil prices prompted investors to increase their bets on future rate cuts from the European Central Bank.
Markets await US jobs data later in the session after economic figures showed on Monday that US manufacturing activity slowed for a second straight month in May, the latest indications that a gradual economic slowdown is underway. settling down.
The number of unemployed people in Germany increased more than expected in May, according to data released on Tuesday.
Oil prices fell as much as 1% in Asian trading, extending losses from the previous session.
Germany’s 10-year yield, the bloc’s benchmark, was down 5 basis points (bps) at 2.54%, after falling 6.5 bps the previous day in its biggest daily decline since on May 15.
“With only 35 basis points expected until the end of the year after the ECB’s potential rate cut this week and the fall in oil prices reviving hopes of disinflation, the dynamic appears set to continue,” said Christoph Rieger, head of rates strategy at Commerzbank.
Investors are taking a 25 basis point ECB rate cut on Thursday for granted, but are uncertain about the outlook.
Money markets are pricing the ECB’s monetary easing in 2024 at 63 basis points – up from less than 55 basis points on Monday – implying two rate cuts and just over 50% chance of a third measure. by the end of the year.
“Yet it appears that markets are heavily influenced by US data when deciding how many ECB cuts to expect this year,” rates strategists at ING said, after reporting that the correlation between yields The US Treasury and Bunds were rising again.
The spread between U.S. and German 10-year yields – a gauge of expectations for monetary policy divergence between the U.S. Federal Reserve and the ECB – hit a new 2-1/2 month low at 180.01 basis points and was at 183.8 basis points, 3 basis points higher than the day before.
The spread between French and German 10-year government bond yields was still around 48 basis points after Standard & Poor’s downgraded France’s sovereign debt rating on Friday, a move that market participants market had largely anticipated.
The yield on Italian 10-year bonds fell 4 basis points to 4.015% after falling 9 basis points, its biggest daily drop since May 15.
“Construction, however, remains generally resilient, defying more fundamental headwinds as the manufacturing PMI continued to fall, bringing the difference with Spain to a record level,” added Mr. Rieger of Commerzbank.
Manufacturing activity contracted in Italy at the sharpest rate of the year, and grew at the fastest pace in more than two years in Spain.
The yield spread between Italian and German bonds, a measure of the risk premium investors seek to hold Italian bonds, was 130 basis points.
The yield on two-year German government bonds, more sensitive to interest rate expectations, fell 3 basis points to 3.00%. (Reporting by Stefano Rebaudo; Writing by Mark Potter)
