Euro zone bond yields nudge higher after US data, Fed in focus
Updates prices at 1505 GMT
LONDON, Sept 17 (Reuters) -Euro zone bond yields nudged higher on Tuesday, a day before a decision on interest rates from the U.S. Federal Reserve which could impact expectations for the European Central Bank's monetary policy path.
German 10-year yields DE10YT=RR, which serve as the benchmark for the wider euro zone, were up 2 basis points at 2.14%, ticking higher in line with U.S. Treasury yields after data showed U.S. retail sales unexpectedly rose in August, potentially complicating market bets on a larger move by the Fed. US/
Bund yields have fallen nearly 20 basis points since the start of September alone however, as markets positioned for substantial easing from global central banks this year, even though the pace remains uncertain.
Two-year Schatz yields DE2YT=RR, the most sensitive to changes in expectations for ECB policy, were up nearly 4 bps at 2.22%.
ECB chief economist Philip Lane said on Monday a gradual approach to easing monetary policy will be appropriate if the incoming data are in line with the central bank's baseline projections.
"We should retain optionality about the speed of adjustment," he said.
Peter Kazimir, Slovakia's central bank chief, was however keen on shutting the door on October, arguing in a blog post on Monday that quick cuts were risky and the ECB needed more hard data proving that inflation is indeed coming back to target by the end of 2025.
Traders think the ECB, which cut rates last week for the second time this cycle, is leaning more towards another 25-bp cut at the December meeting, rather than October, while U.S. markets shows investors are placing around a 60% chance the Fed will cut rates by 50 bps on Wednesday.
The uncertainty about how much the Fed will move by is keeping assets around the world in check.
"Until the Fed meeting, we expect euro rates to trade sideways," ING strategist Benjamin Schroeder said.
"The spillovers from a 50-bp cut would have some bullish spillovers to the Bund curve, including more steepening, and will also likely increase pricing for an October cut. But overall the scope for lower Bund yields is limited," he said.
Italian 10-year yields IT10YT=RR were up 2 bps at 3.50%, leaving the premium over Bunds DE10IT10=RR unchanged on the day at 135 bps.
Investors were also processing data that showed German investor morale darkened more than expected in September, the ZEW economic research institute said on Tuesday, as the assessment of the economic situation continued its downward trend.
The economic sentiment index fell to 3.6 points - the lowest since last October - from 19.2 points in August. Analysts polled by Reuters had pointed to a reading of 17.0.
"The hope for a swift improvement in the economic situation is visibly fading," said ZEW president Achim Wambach.
Reporting by Amanda Cooper; additional reporting by Alun John, Editing by Andrew Heavens, William Maclean and David Evans
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