Euro zone bond yields fall, tracking U.S. Treasuries
Euro zone government bond yields fell on Friday, after a mixed start, taking cues from U.S. Treasuries while German data failed to trigger any immediate price action.
The German economy likely stagnated in the final quarter of last year and grew by 1.9% over the full year 2022, the Federal Statistics Office said on Friday, suggesting Europe’s largest economy may escape a recession over the winter.
U.S. Treasury yields fell in London trade after inflation numbers cemented expectations of a slower rate-hiking path from the Federal Reserve.
Germany’s 10-year yield was down 3 basis points (bps) to 2.10%. On Thursday, it spent most of the session at its lowest levels in four weeks before hitting a day’s low after the U.S. numbers at 2.06% and closing higher than before the data.
Analysts said a bleak economic outlook in the bloc might slow down monetary tightening, even though European Central Bank officials had reiterated they would raise interest rates to fight inflation even in a recession.
“It’s a sort of tug of war with the financial markets, which bet that weak economic data and peaking inflation can force a policy easing,” said Massimiliano Maxia, senior fixed-income specialist at Allianz Global Investors.
“It’s difficult to say who’s right, but we are still slightly underweight on duration,” he added.
Greek central bank chief Yannis Stournaras said on Thursday the ECB would continue raising interest rates until there was certainty that inflation was de-escalating towards the 2% target over the medium term.
Forwards on the ECB euro short-term rate (ESTR) peaked in August 2023 at 3.3%, while pricing in a policy rate at 3.2% in December 2023 and at 2.8% in May 2024.
ECB policymaker Martins Kazaks is pushing back on investor bets that the ECB will cut interest rates by the end of this year, saying it would take a deep recession for borrowing costs to be lowered.
Italy’s 10-year government bond yield fell 8.5 bps to 3.92%, with the spread between Italian and German 10-year yields hitting its lowest since Dec. 8 at 178 bps.
The gap tightened by almost 20 bps this week, while bonds – but not the ECB ESTR forwards – were pricing a slower monetary tightening path from the ECB.
While headlines about German proposals for more joint EU debt fit the picture, this has been “probably more of an excuse to cover shorts in the periphery,” Christoph Rieger, head of rates and credit research at Commerzbank, said.
Media said earlier this week that German Social Democrats would call for the European Union to create new joint financing instruments to help member states compete against increased U.S. subsidies for green technology. (Reporting by Stefano Rebaudo, editing by Bradley Perrett and Sharon Singleton)
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