June 30 – Euro zone government bond yields edged down on Monday as investors slightly increased bets on European Central Bank rate cuts after inflation data from German states.
Inflation fell in three important German states in June, suggesting the country’s national inflation rate could ease.
Italian EU-harmonised consumer prices readings were slightly below a median forecast.
Meanwhile, German retail sales and import prices fell short of expectations in May.
Trade talks are also in the spotlight after Canada scrapped its digital services tax targeting U.S. technology firms in a bid to advance stalled trade negotiations with the U.S.
German 10-year yield, the euro area’s benchmark, dropped 2 basis points to 2.58%.
Lending growth was little changed across the euro zone in May, indicating that the support provided by the ECB’s string of interest rates cuts was offset by souring economic sentiment.
Money markets priced in an ECB depo rate at 1.74% in December from 1.76% before inflation data. The deposit facility rate is currently at 2%.
Markets await U.S. jobs data later this week, which are crucial for the Federal Reserve’s monetary policy path.
“The relative strength of the labour market is precisely what allows the Fed to be patient and wait for more clarity on the impact of tariff increases on the real economy,” said Bruno Cavalier, chief economist at Oddo.
U.S. President Donald Trump repeatedly criticised Fed Chair Jerome Powell for not cutting rates and said on Friday that he would “love” it if Powell were to resign and rates were at 1%.
The 30-year yield was down one bp at 3.09%, after reaching last week 3.119%, its highest level since May 26. The 2-year – more sensitive to expectations for European Central Bank policy rates – was down 1.5 bps at 1.85%.
The German yield curve steepened last week, with the spread between 10-year and 2-year yields recording the first weekly rise in a month.
The curve steepened as markets have priced in an ECB terminal rate roughly unchanged at around 1.75–1.80%, while yields on longer maturities rise amid expectations of a significant increase in German fiscal spending.
Italy’s 10-year yields fell 2 bps to 3.49%, with the spread between BTPs and Bund yields at 90 bps. It hit 84.20 bps earlier this month, its lowest since March 2015.
Citi expects most euro zone bond spreads to tighten against Bunds by year-end, led by Bonos and BTPs, with target levels at 50 and 75 bps basis points respectively.
Citi argued that the “view finds support from the front-loaded German fiscal stimulus announced last week,” and that “the increased NATO target for defence spending is a fiscal risk” for Italy and Spain.
German lawmakers passed a multi-billion-euro package to support companies and boost investment.
This article was generated from an automated news agency feed without modifications to text.
