Germany's 2-year bond yield , which is highly
sensitive to interest rate expectations, was last down 12 basis
points (bps) at 2.777%. The yield, which moves inversely to the
price, has fallen nearly 20 bps this week - the largest one-week
drop since mid-March when turmoil in the banking sector reached
crisis point.
Preliminary data showed euro zone gross domestic product
(GDP) grew just 0.1% in the first quarter, after flatlining in
the previous three months and compared to expectations in a
Reuters poll for 0.2% growth.
Germany, the euro zone's biggest economy, stagnated in the
quarter, despite expectations for growth of 0.2%.
The German 10-year bond yield , the bloc's
benchmark, fell 13 bps to 2.319%. Yields on the Bund, which hit
an 11-year peak of 2.77% at the start of March, have fallen 16
bps this week, also the most since mid-March, days before the
hastily arranged takeover of Credit Suisse by rival UBS .
"The German data at first glance are all a bit weak: GDP,
inflation and labour market data," said Holger Schmieding, chief
economist at German lender Berenberg.
Yet Schmieding said he thinks the sharp fall in yields is
unjustified, as the figures were broadly in line with
expectations and showed some signs of inflationary pressure.
Consumer prices in Germany posted their smallest increase
in April since the start of the war in Ukraine and came in lower
than expected in Spain, although France's inflation ticked up on
a year-on-year basis. The figure for the euro zone is released
on Tuesday.
The closely watched gap between Germany and Italy's 10-year
yields rose to its highest in a month at 194 bps
earlier in the session. The spread was last at 186 bps. Italy's
10-year yield was 15 bps lower at 4.2%.
Traders are attaching an 80% chance that the ECB will raise rates by just a quarter of a point next week, up from around 70% prior to the GDP figures. Traders now see interest rates peaking at around 3.7% in November, below the peak of 3.9% that was priced in earlier this week. Yet the outlook remains uncertain, said Andrew Kenningham, chief European economist at Consultancy Economics.
"I don't think the data published so far provide a knock-out blow for either the 25bp (dovish) or the 50bp (hawkish) camp," he said. "We don't really have any visibility yet on the key core inflation number other than for France, where it will have risen a bit because services inflation is up." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The race to raise rates ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Harry Robertson; Editing by Kirsten Donovan)
