Euro zone government bond yields ticked lower on Monday as investors await inflation data later this week while U.S. financial markets closed for holiday.
Cash U.S. Treasuries were untraded in Asia and Europe on Monday, owing to the Memorial Day holiday, while futures were steady after an agreement on the U.S. debt ceiling.
President Joe Biden on Sunday finalized a budget deal with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt limit until January 1, 2025, and said the deal was ready to move to Congress for a vote.
Germany’s 2-year government bond yield, more sensitive to expectations for policy rates, was down 0.5 basis points (bps) at 2.97%.
On Friday it hit its highest level since March 15 at 2.991%, almost 30 bps below the closing on March 9, the day before the banking turmoil started affecting financial markets.
Germany will publish consumer price data on Wednesday, while euro area numbers will be released on Thursday.
“While we have the stronger conviction that the peak for (euro zone) core goods inflation is behind us, we now expect slower moderation from here,” said Ruben Segura-Cayuela, European economist at BofA, in a research note. “A strong summer season is likely to keep services inflation from clearly peaking in the next few months.”
“We incorporate an acceleration in energy prices in the second half of the year, the situation is fragile, and upside surprises can’t be ruled out,” Segura-Cayuela added, mentioning the evolution of wages and the risk of second-round effects.
BofA expects headline inflation at 5.3% this year and 2.4% in 2024, with core inflation at 4.8% and 2.5%.
Irish central bank chief Gabriel Makhlouf said on Friday that more than two ECB rate hikes this year remain open to debate as inflation is still stubborn.
Money markets have been pricing more than two rate hikes since early last week while postponing the peak in policy rates from September to December.
December 2023 ECB euro short-term rate forwards were at 3.75%, implying expectations for a deposit facility rate of 3.85% by year-end.
Germany’s 10-year government bond yields, the bloc’s benchmark, fell one bp to 2.53%.
Greece’s 10-year yields dropped 2 bps to 3.92%, with the gap between Greek and German yields hitting its lowest since October 2021 at 128.7 bps.
Greek bond prices jumped last week as the election outcome boosted expectations that the country will continue its policies supporting economic growth and declining debt.
Greece’s president will appoint a caretaker prime minister on Wednesday to form a government leading the country to a repeat election on June 25.
Markets believe a second vote, which gives the leading party bonus seats, will give the conservative New Democracy party the majority needed to rule alone.