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HomeboeEuro zone bond yields dip slightly as inflation expectations rise

Euro zone bond yields dip slightly as inflation expectations rise

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Euro zone bond yields experienced a slight decrease on Wednesday as investors deliberated over signs of an economic slowdown in contrast to a survey showing a rise in consumer inflation expectations for September. Germany’s 10-year bond yield, considered the benchmark for the bloc, fell by 2 basis points to 2.646%, just above a nearly two-month low of 2.629% reached last week. The movement of yields runs inversely to prices.

Over the past two weeks, international bond yields have seen a significant decline following decisions by the European Central Bank (ECB), Federal Reserve, and the Bank of England to keep interest rates unchanged during their latest meetings. Additionally, yields have been tempered by weaker-than-anticipated US economic data and adjustments to US Treasury debt issuance plans.

This week, there is a lack of major economic data scheduled for release within the euro zone. However, Tuesday’s figures revealed a deepening industrial downturn in Germany, further contributing to the narrative of a sharply decelerating euro zone economy.

Market pricing in derivatives demonstrated that investors anticipate a decrease of approximately 90 basis points in ECB interest rates by the conclusion of 2024.

Tim Graf, the head of macro strategy for Europe at State Street Global Markets, stated, “I’m a bigger fan of duration (longer-dated bonds) than I was six months ago, as inflation is not a problem as it was six months ago and growth is slowing.”

On Tuesday, a market-based indicator of long-term inflation expectations known as five-year five-year inflation swaps dropped to its lowest level since May and remained at around 2.44% on Wednesday.

Meanwhile, Brent crude oil fell to its lowest point since July on Tuesday, reaching $81.40. Concerns regarding the potential expansion of the Israel-Hamas conflict have been disregarded by the market.

However, an ECB survey revealed that consumers have increased their inflation expectations for the next 12 months to 4% in September, up from 3.5% in August.

Following the release of this data, euro zone yields slightly rebounded but remained lower for the day. Italy’s 10-year bond yield stayed relatively unchanged at 4.56%.

Portugal’s 10-year bond yield continued to trade in line with its euro zone counterparts, experiencing minimal fluctuation at 3.407%. This follows President Antonio Costa’s resignation due to a corruption investigation.

Given the relatively light economic calendar, investor attention has shifted towards central bank speakers. On Wednesday, officials set to deliver speeches include the ECB’s Joachim Nagel and Pablo Hernandez de Cos. However, the main focus for the market will be Federal Reserve Chair Jerome Powell, who is scheduled to speak at 1415 GMT.

State Street’s Graf suggested that yields could rise if Federal Reserve speakers imply that interest rates will not be reduced in the near future.

Germany’s 2-year bond yield, which is sensitive to expectations regarding ECB interest rates, remained unchanged at 3.067%. It has declined from a 15-year peak of 3.393% observed in July.

More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )

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