LONDON: Euro zone government bond yields dipped on Friday, as the market celebrated getting through a busy week of issuance unscathed and also caught up with a late move in US Treasuries after the European close the day before.
The 10 year German Bund yield, which moves inversely to its price, was down 5 basis points (bps) at 2.15%, but is set to finish the week a fraction higher.
That would be the euro zone benchmark yield’s third week of increases, the longest such streak since October, a reflection both of bonds’ rally in November and December as markets first ramped up bets of central bank rate cuts early in 2024, and their sell off this year as those expectations were pared back.
Markets are now showing around a one third chance of an European Central Bank (ECB) rate cut as soon as March, which had been close to fully priced in late December.
Speaking of Friday’s move, Societe Generale’s interest rates strategist Jorge Garayo said: “I think it is perhaps a bit of a relief rally after all the supply we’ve seen in the last three or four days, but it’s within the normal range of noise in a market where volatility continues to be reasonably high.”
“The trend in European government bonds is really all about supply, and how that’s going, and so far so good.”
Spain raised 15 billion euros ($16 billion) from a 10-year bond sale on Wednesday on the back of record investor demand exceeding 130 billion euros.
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Belgium saw a record 75 billion euros of demand for a 10-year bond sale on Tuesday, while Italy attracted nearly 150 billion euros of demand for two bonds of a combined 15 billion euros.
Markets also passed through the week’s big macro economic data development, Thursday’s US consumer price inflation data, largely unscathed.
That data showed US consumer prices increased more than expected in December, though while short dated US Treasury yields briefly moved higher, the yield on the two year Treasury finished the day down 10 bps.
“This market action seems to highlight the weight of evidence that would be required to dissuade the market from its current pricing of an aggressive rate cutting path and decline in inflation,” said analysts at Rabobank.
The US rally happened after the European close, which “explains the strong rally from (German) Bunds upon opening this morning,” Rabobank said.
Italy’s 10 year yield dropped around 6 bps to 3.76%, and the gap between the German and Italian 10 year yields reached as narrow as 156.7 bps, its tightest in two weeks.
“Typically in January you get very good performance in peripherals. It’s an indication that there is a lot of cash to be put to play, when you get to February March then that gets more difficult,” said SocGen’s Garayo.
Investors were also digesting news the United States and Britain carried out strikes from the air and sea against Houthi military targets in Yemen, though, apart from oil, analysts said market reaction was fairly limited.
Shorter dated euro zone bonds also rallied. The German two year yield was down 6 bps at 2.57% and the Italian two year yield was down 4 bps at 3.14%.
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