Euro zone bond yields fall before U.S. inflation data

By Stefano Rebaudo Feb 14 (Reuters) - Euro zone bond yields edged lower on Tuesday as investors await U.S. inflation data which might provide further clues about the monetary tightening path across the Atlantic, affecting expectations for the European Central Bank’s next moves. Economists forecast the U.S. Federal Reserve will raise interest rates at least twice more in the coming months and see upside risks and no rate cuts by year-end.

In the euro area, money market bets on rate hikes have been pushing higher since ECB policymakers fought back against expectations for a quick end to the tightening cycle last week. According to ECB euro short-term rate (ESTR) forwards, the ESTR will peak in September at more than 3.5%, implying expectations for a depo rate above 3.6%. < EUESTECBF=ICAP> The ESTR published by the ECB reflects the wholesale euro unsecured overnight borrowing costs of banks. It's usually around 10 basis points (bps) below the deposit rate. European Commission forecasts have provided some relief to the market since Monday as they showed Eurozone economic growth is likely to be stronger than expected this year while inflation will be lower than in forecasts made towards the end of 2022.

Analysts underlined that 2-year Treasuries and 2-year Schatz have the highest sensitivity to U.S. inflation surprises, while a less forceful Fed guidance has left investors more dependent on economic data. Germany's 10-year government bond yield was down 4.5 bps at 2.328%.

It was still far from the 2.569% hit at the end of 2022, its highest since August 2011, though it then fell to its lowest in over a month at 1.967% in mid-January. The German 2-year yield fell 1.5 bps to 2.768%, just off its highest level since October 2008 at 2.789% hit on Monday. While higher terminal rates have translated into a material repricing of short-term bonds, this happened less for long-term ones, which might be more vulnerable to a potential selloff. “There is undeniably some upside to rates across maturities today on an upside inflation surprise, but the front end remains the most volatile point on the curve, so a change in the slope should be the clearer take-away,” ING strategists led by Padraig Garvey said in a note, referring to U.S. rates. “We find an even stronger case for the repricing higher in European rates as the ECB is still behind the Fed in its fight against inflation,” they added. Italy’s 10-year yield dropped 5 bps to 4.13%, with the spread between Italian and German 10-year yields at 179 bps.
(Reporting by Stefano Rebaudo, editing by Christian Schmollinger)

Reuters

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Euro zone bond yields fall before U.S. inflation data

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