Bund yields fall to 3-week lows, Italian spread at 1-1/2-week high
Adds comments, background in paragraphs 3, 7-10, 12-13
By Stefano Rebaudo and Harry Robertson
LONDON, May 7 (Reuters) -Euro zone yields fell for a fourth straight session on Tuesday afterinvestors increased their bets on interest ratecuts from the Federal Reserve and the European Central Bank this year, following weak U.S. jobs data on Friday.
Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was down 5.5 basis points (bps) to 2.418%, its lowest level since April 15.
Money markets priced around 75 bps of ECB rate cuts in 2024 EURESTECBM5X6=ICAP, a level reached last week after the U.S. data. They discounted 45 bps of Fed monetary easing FEDWATCH, implying an 80% chance of a second cut in 2024.
A string of hot data in the world's most important economy had led investors to price less than twoFed rate cuts this year, down from around seven at the start of 2024. The importance of the U.S. economy meant investors also lowered their expectations for other major central banks.
"Little stands in the way of the gradual drift lower in yields," said Christoph Rieger, head of rates and credit research at Commerzbank.
"The thin (data) calendar ... is unlikely to change the view that the U.S. economy is slowly losing steam."
Italy's 10-year government bond yield IT10YT=RR dropped 3.5 bps to 3.77%.
The spread between Italian and German 10-year yields - a gauge of risk-premium investors ask to hold bonds of the euro area's most indebted countries - was up 4 bps at 134.50 bps after reaching 135.60, its widest level since April 26.
It briefly hit a fresh 1-1/2-month low at 120.20 on Monday as Fitch confirmed a BBB rating on the Italian debt. Preliminary data showed on Tuesday that orders for BTP-valore - a new retail bond Italy is offering this week - were at 5 billion euros at 0940 GMT of the second day of the offering, down from 11.5 billion euros at the end of the second day of February's sale.
Retail investors have supported demand for peripheral bonds for months as they rushed to lock in the most appealing returns over a decade. Bond prices move inversely with yields.Germany's 2-year bond yield DE2YT=RR, which is more sensitive to policy rate expectations, was down 1 bp at 2.904%.
Data on Tuesday showed that 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 was lingering.
"We expect rising real wages and easing financial conditions to boost domestic demand over the coming quarters, with a rotation back from services to goods," said Christian Schulz, deputy chief European economist at Citi.
"However, we expect the impetus to be curbed by fiscal normalization and lagged effects of the sharp monetary tightening," he added.
ECB policymakers said on Monday they were growing more confident about cutting interest rates, as the economy returns to mild growth and inflation looks to be undercontrol.
Gross domestic product figures last week showed the euro zone's economy grew 0.3% in the first quarterafter a small recession. Euro zone inflation fell to 2.4% in April.
Reporting by Stefano Rebaudo and Harry Robertson, additional reporting by Sara Rossi; Editing by Andrew Heavens, Mark Potter and Paul Simao
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