Euro zone bond yields set for solid weekly rise on strong data
Adds comments, chart, background
By Harry Robertson and Stefano Rebaudo
LONDON, May 24 (Reuters) -Euro zone bond yields were on track for their biggest weekly rise in a month on Friday, although they were little changed on the day, after strong economic data caused traders to further scale back their bets on central bank interest rate cuts.
Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, was down 1.5 basis points (bps) at 2.59% after hitting 2.618%, its highest since April 26.
The yield, which moves inversely to the price, was heading for a 7.5 bps rise across the week.
A survey-based gauge of the economy on Thursday showed euro zone business activity expanded at its fastest pace in a year this month, supported by buoyant demand for services, while the manufacturing sector showed signs of recovery.
Separate data showed euro zone wage growth remained strong and U.S. survey numbers pointed to continued strength in the American economy.
The readings convinced traders that the world's central banks are less likely to lower interest rates this year. They now price in 57 bps of European Central Bank rate cuts in 2024 - which implies two 25 bps move and an around 30% chance of a third cut - down from closer to 75 bps in mid-May.
Analysts highlight that markets have started discounting less than a cut every quarter, a move which rate derivatives have priced in for months.
Bundesbank President Joachim Nagel on Friday said a rate move by the ECB in June was more likely if price development remains stable.
"Yesterday's data was another reminder that the timing for a full-blown global easing cycle is still a long shot," said Michiel Tukker, senior European rates strategist at ING.
"The pricing for European Central Bank cuts in 2024 is down to 60 bp (and) could go even lower in our view. For the U.S., the case for higher yields based on the latest figures is even stronger."
Germany's 2-year yield DE2YT=RR, which is sensitive to ECB rate expectations, was flat at 3.08% on Friday, after hitting 3.124%, its highest level since November.
The spread between U.S. 10-year Treasuries and German bunds DE10US10=RR - a gauge of the expected policy path divergence between the ECB and the Fed - tightened slightly to 188 bps. It reached 220 bps in mid-April.
"We should not expect the Fed to cut any time soon while the start of the easing cycle for the ECB looks around the corner," said BofA's economist Claudio Irigoyen, adding its forecasts included the recent inflation prints and the output gaps.
According to BofA, the spread between U.S and German yields can break recent peaks by year-end.
Next week investors will be looking closely at U.S. personal consumption index inflation - the Federal Reserve's preferred measure - and headline euro zone consumer price index figures.
Italy's 10-year yield IT10YT=RR was down 0.5 bps at 3.89% on Friday and was set for a weekly rise of 8.5 bps.
ESTRDec24 https://tmsnrt.rs/44TLq32
Reporting by Harry Robertson and Stefano Rebaudo; editing by Philippa Fletcher, Ed Osmond and Alex Richardson
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
