Yields in the euro zone benchmark Bund were on track for their biggest weekly fall since mid-December as money markets stabilized their bets on future European Central Bank rate cuts.
The Bund yield recorded its first monthly rise in January since September 2023, as investors scaled back what some analysts called “an overly optimistic” view of monetary easing priced into the market at the end of 2023.
It last rose 2 bps to 2.16% on Friday and was on track for a weekly fall of 14 bps.
The ECB euro-short-term rate forwards last priced in around 145 basis points (bps) of rate cuts by year-end from around 175 basis points at the end of last year and 135 bps a couple of weeks ago.
Investors were closely watching moves in US Treasuries ahead of crucial jobs data due later in the session and as concerns about the health of US regional banks resurfaced.
New York Community Bancorp reported increased stress in its commercial real estate portfolio, renewing fears over the health of similar lenders.
Euro zone bond yields dip at end of busy week of issuance
Thursday’s US data showed worker productivity gains well above the long-term average, which may further open the door to interest rate cuts by the Federal Reserve.
“Ahead of non-farm payrolls (NFP), other more reliable indicators are consistent with a labour market that continues to ease,” Deutsche Bank said in a research note.
Euro zone sovereign bond yields fell on Thursday after US economic data partly offset the impact of sticky service inflation in the euro area and Federal Reserve remarks that dashed expectations of quick monetary easing.
“Our harmonized index of consumer prices (HICP) profile is revised higher this week to account for the stronger-than-expected core HICP print in January,” said Christian Schulz, deputy chief European economist at Citi.
“While euro zone unemployment is reaching new cyclical lows, surveys this week showed signs of labour market loosening.”
Analysts reckoned that with disinflation in the euro area on track and the government bond supply set to fall significantly in the next few weeks after the seasonal peak of January, the medium-term risk of a further fall in bond prices is fading. However, they will keep their focus on the central banks’ policy path.
“What’s clear is that all three (Fed, ECB and Bank of England) are reluctant to jump headlong into rate cuts too soon,” said Barnaby Martin credit strategist at BofA.
Fed Chair Jerome Powell suggested the central bank would only cut rates with more evidence that inflation was moving towards the 2% target, while the BoE was cautious on rate cuts.
Martin added that BofA economists looked for both the Fed and the ECB to deliver first cuts in June this year, with the BoE starting in August.
Italy’s government bond 10-year yield - the benchmark for the euro area’s periphery - rose 0.5 bps to 3.73%.
The gap between Italian and German 10-year yields was at 155 bps.
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