Euro zone government bond yields fall, focus on ECB

LONDON: Euro zone government bond yields fell on Friday as investors shrugged off US inflation data and kept their focus on recent remarks by European Central Bank officials that soothed fears of aggressive monetary tightening.

US consumer spending rose more than expected in April, while annual inflation seems to have peaked, which could underpin economic growth in the second quarter.

Comments from ECB policymakers tended to rule out a 50 basis points (bps) rate hike in July, while minutes from May’s Fed meeting indicated the central bank might pause rate hikes later in the year.

Germany’s 10-year government bond yield fell 5.5 bps to 0.94%.

“At the moment, we have a neutral stance on Bunds. We see German bond yields flat to lower rather than meaningfully higher,” said David Riley, chief investment strategist at BlueBay Asset Management, adding Bund yields would remain dependent on inflation data.

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.

Italy’s 10-year government bond yield fell 4.5 bps to 2.86%.

The spread between Italian and German 10-year yields was at 191 bps after falling by 10 bps to around 190 on Thursday, in its biggest tightening since March 2022.

Spreads between Portuguese and Greek 10-year bond yields against their German counterparts were respectively down 2 bps and flat.

The German-Spanish spread widened 4 bps to 105. Strong inflation, which is running at its fastest pace in three decades, has weighed on Spanish bond prices.

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 ECB President Christine Lagarde’s support for a gradual approach to policy tightening.

Furthermore, Fitch will release its latest view on Italy’s ratings late on Friday.

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