German 2-year yield hits lowest since Feb, curve least inverted in 6 months
Adds background, updates prices
By Stefano Rebaudo and Alun John
LONDON, July 25 (Reuters) -Germany's two-year debt yield hit its lowest level since February on Thursday and the yield curve was its least inverted in six months as weak economic data led investors to bet on a quicker European Central Bank monetary easing cycle.
Euro area borrowing costs pared their early fall after U.S. data showed the economy grew faster than expected, but inflation subsided, supporting expectations for a September interest rate cut from the Federal Reserve.
U.S. figures "will quiet some voices calling for a cut as early as next week", said Colin Finlayson, investment manager at Aegon Asset Management. Markets fully priced a Fed first rate cut in September.
U.S. Treasury yields were mostly lower on Thursday after a tumble in equities helped fuel safe-haven buying of bonds.
Economic data from the euro zone showed a less rosy picture, with the German Ifo Institute saying its business climate index fell to 87.0 in July from 88.6 in June, compared with a reading of 88.9 forecast by analysts in a Reuters poll.
A survey showed on Wednesday that euro zone business activity stalled in July.
German short-dated bond yields have dropped recently while the long-dated recorded just a slight fall, bringing the yield curve to its least inverted level in six months.
Germany's two-year yield, sensitive to policy rate expectations, was down 3.5 basis points (bps) at 2.69%, after hitting 2.365%, its lowest since early February. DE2YT=RR
It has fallen around 15 bps in the last three trading sessions in the wake of weak economic data from both sides of the Atlantic.
The euro zone benchmark 10-year Bund yield DE10YT=RR dropped 3 bps to 2.41%. The spread between the two rose to -26.5 bps after reaching earlier in the session -23.3 bps, its least inverted since January. DE2DE10=RR
Money markets fully priced in 50 bps of ECB rate cuts and a less than 10% chance of a third easing move by year-end EURESTECBM3X4=ICAP. They expect the easing cycle to end around summer 2025 with an ECB deposit facility rate of about 2.5%, roughly unchanged from the previous days' expectations.
The ECB deposit rate is now at 3.75%.
"Unfortunately for the ECB, the Ifo survey is less clearly deflationary than the PMIs yesterday," said Christian Schulz, deputy chief European economist at Citi.
"Hiring intentions fell sharply in the services sector and were steady in manufacturing, suggesting further easing in the labour market," he added.
"However, price expectations actually rose marginally in the downstream services and retail trade industries."
Meanwhile, the premium investors demand to hold French bonds rather than German Bunds DE10FR10=RR was at 70 bps.
It rose to 71.70 bps, the highest since France's inconclusive election earlier this month, after the far-left La France Insoumise's (LFI) proposal to reverse President Emmanuel Macron's pension reform with support from the far-right Rassemblement National (RN).
Reporting by Stefano Rebaudo and Alun John; Editing by Emelia Sithole-Matarise and Mark Potter
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