Euro zone bond yields drop, focus on next week’s US inflation data

Euro zone government bond yields declined on Friday, mirroring the drop in U.S. Treasuries late on Thursday, with investors now turning their focus to the U.S. inflation data due next week which could affect the Federal Reserve’s policy path.

U.S. inflationhas been largely stalled for the first three months of the year at a rate, roughly 2.7%, that policymakers regard as still too far above their target to declare the job finished, but also so close to it they’ve been reluctant to say that further rate increases may be likely.

The outcome of the Bank of England (BoE) policy meeting and U.S. data on Thursday failed to affect market expectations about the central banks’ easing cycle.

Germany’s 10-year government bond yields DE10YT=RR, the bloc’s benchmark, dropped 3 basis points (bps) to 2.47%.

Markets keep pricing a divergence between the European Central Bank and the Fed easing cycle ofaround 25 basis points in 2024, with some analysts saying that a further widening could weaken the euro and fuel inflation pressures in the bloc.

Investors lastpriced in 70 bps of ECB rate cuts in 2024 EURESTECBM5X6=ICAP, and 45 bps for the Fed FEDWATCH.

“With an eye on increased geopolitical tensions in the Middle East, we maintain our constructive duration stance into the weekend,” said Hauke Siemssen, strategist at Commerzbank.

A senior Israeli official said that the current round of negotiations in Cairo over a possible hostage-release deal have ended without apparent resolution of differences. Israel will proceed with its operation in Rafah as planned.

Fears of a broadening conflict in the Middle East have recently triggered a rush into safe-haven assets, driving bond prices higher and their yields lower.

Italy’s 10-year yield IT10YT=RR fell 5 bps to 3.79%, and the yield gap between Italian and German bonds DE10IT10=RR — a gauge of the risk premium investors seek to hold bonds of the euro area’s most indebted countries — was at 131 bps.

Orders for Italy’s new 6-yearBTP Valore retail bond have reached 11 billion euros, while he previous BTP Valore edition attracted bids worth 18.3 billion euros.

Demand from retail investors has supported Italian government bond prices for months, with investors wondering if it’s now waning.

“The retail bonds issued by the Tesoro also offer hold-to-maturity bonuses and strong tax incentives which could potentially negate some of this pricing difference (with bank deposits),” said Rohan Khanna, head of euro rates strategy at Barclays, adding the yield-seeking approach of Italian households is unlikely to change.

Germany’s 2-year yield DE2YT=RR, more sensitive to policy rate expectations, fell 0.5 bps to 2.93%.
Source: Reuters (Reporting by Stefano Rebaudo; Editing by Sonali Paul and Toby Chopra)