Euro zone bond yields fall for second day after U.S. inflation cools

Reuters · 05/11/2023 08:10
Euro zone bond yields fall for second day after U.S. inflation cools

By Harry Robertson

- Euro zone government bond yields fell for a second day running on Thursday after data showed U.S. inflation cooled more than expected in April.

Consumer price index inflation in the United States came it at 4.9% year-on-year in April, data on Wednesday showed. That was the 10th straight monthly fall and was marginally below the 5% figure economists expected.

Germany's 10-year bond yield DE10YT=RR fell 3 basis points (bp) to 2.262%, after a 4 bp fall on Wednesday. Yields move inversely to prices.

The German two-year yield DE2YT=RR, which is more sensitive to interest rate expectations, was last down 3 bps at 2.593% after also falling 4 bps the previous day.

The drop in yields came despite Bloomberg reporting that some European Central Bank officials think interest rate hikes might be as far out as September and that rates could rise to 4%.

Pooja Kumra, European rates strategist at TD Securities, said euro zone bonds were shrugging off the possibility of further ECB hikes and were rallying on the back of the U.S. data.

"They're able to sell off as much as how hawkish the ECB is right , just because everyone things that once the Fed is done, everyone will follow," she said.

Last week, the ECB raised rates by 25 bps to 3.25%, a slowdown in the pace of increases.

The sharp drop in U.S. inflation - it peaked at 9.1% in June last year - has alleviated the pressure on the Federal Reserve to keep raising interest rates.

That in turn has lessened pressure on central banks such as the ECB, given the importance of the U.S. economy.

Italy's 10-year yield IT10YT=RR was last down 3 bps at 4.18%. That took the closely watched gap between German and Italian borrowing costs DE10IT10=RR to 190 bps.

Ratings agency Fitch will update its credit rating on Italy on Friday, one of a of risks coming up for Italian bonds.

Joachim Nagel, ECB policymaker and German central bank chief, told Bloomberg on Thursday that the "story about hiking rates is over".

Yet on Wednesday, ECB policymaker Mario Centeno said the central bank is approaching the end of the rate-hiking cycle.

Investors will listen closely to a speech by ECB governing council member Isabel Schnabel on Thursday for any further hints.

The Bank of England will set interest rates later on Thursday. Traders broadly expect the central bank to hike 25 bps to 4.5%, with British inflation running in double figures in March.

(Reporting by Harry Robertson; Editing by Angus MacSwan)