Euro zone government bond yields mixed ahead of US price data

Germany’s long-dated borrowing costs edged lower on Friday, with investors seeing the 10-year Bund yield at around 1% after a less hawkish stance from the European Central Bank soothed fears of aggressive monetary tightening.

Recent comments from ECB officials tend to rule out a 50 basis points (bps) rate hike in July, while minutes from the Fed meeting indicated the central bank might pause rate hikes later in the year.

Germany’s 10-year government bond yield fell 1.5 bps to 0.988%.

Janus Henderson said the 10-year Bund yield was expected to be data-dependent between 0.8% and 1.2% by year-end.

Allianz Global Investors argued it would stay at around 1% before the ECB policy meeting on June 9.

Investors are awaiting US personal consumption expenditure price index (PCE) – the Fed’s preferred inflation gauge – later on Friday.

“A softer outcome from the US core PCE today, as our economists are expecting, amid signs that the year-on-year price pressure is levelling off further could keep the bullish steepening in USTs intact ahead of the long US weekend,” Commerzbank analysts said in a note to clients.

Euro zone bond yields at multi-week lows as US inflation weakens sentiment

“Similar dynamics are also driving European government bonds,” they added. Italy’s 10-year government bond yield rose 0.5 bps to 2.907%.

The spread between Italian and German 10-year yields was at 192 bps after falling by 10 bps to around 190 on Thursday, in its biggest tightening since March 2022.

Spreads between Spanish, Portuguese and Greek 10-year bond yields against their German counterparts were mixed after tightening by 5-7 bps on Thursday.

Analysts expect inflation data from the euro zone on Tuesday to put the recent spread tightening between core and peripheral yields to a test after they took comfort from “gradualism” advocated by the ECB president Christine Lagarde recently. Furthermore, Fitch will revise Italy’s ratings late on Friday.

Analysts said Fitch is the most sensitive of the three leading agencies to debt ratios and is likely to be vigilant to rising interest costs on sovereign debt amid increasing yields.

However, they expect the rating agency to wait for ratings or outlook changes amid uncertainty about the ECB policy stance and the likely rising political risk into year-end due to parliamentary elections in the first half of 2023.