Euro zone bonds were little changed on Wednesday after central bank officials did little to disabuse investors’ hopes that the next move in interest rates will be down.
Germany’s 10-year bond yield DE10YT=RR, the benchmark for the bloc, was 1 basis point (bp) higher at 2.561%.
The yield touched a 12-year high of 3.024% in early October before dropping sharply as economic data in the U.S. and Europe suggested inflation would slow quicker than previously thought. Yields move inversely to prices.
Italy’s 10-year yield IT10YT=RR was flat at 4.318%, and down from an 11-year high of 5.025% in October.
Jussi Hiljanen, head of rates strategy at lender SEB, said trading was muted as U.S. investors prepared for the Thanksgiving holiday on Thursday.
“Secondly, we have had quite massive movements over the past two weeks or so in many markets, including bond markets, so it’s kind of a consolidation now.”
Bond traders were showing little reaction to minutes from the U.S. Federal Reserve’s last meeting at the start of November. They showed that officials agreed they would go “carefully” and raise interest rates only if progress in controlling inflation faltered.
European Central Bank chief Christine Lagarde echoed this cautious message, which has become something of a mantra among central bankers, on Tuesday.
“This is not the time to start declaring victory,” Lagarde said in Berlin. “We need to remain focused on bringing inflation back to our target.”
The gap between Italy and Germany’s 10-year yields DE10IT10=RR, a gauge of investor sentiment towards the euro zone’s more indebted countries, was 1 bp lower at 174 bps. It hit a two-month low of 170 bps on Tuesday.
Pricing in derivatives markets showed that investors expect the ECB to cut interest rates by around 90 bps by the end of next year, from the current record high of 4%. Those bets have shifted little since the start of November.
Germany’s 2-year bond yield DE2YT=RR, which is sensitive to ECB interest rate expectations, was last up 2 bps at 2.994%. It hit a 15-year high of 3.393% in July but has since cooled.
Investors will keep an eye on Britain, where finance minister Jeremy Hunt will unveil new taxing and spending plans on Wednesday.
Just over a year ago, then finance minister Kwasi Kwarteng sparked chaos in global bond markets with a package of large unfunded tax cuts. Hunt is expected to be more measured, with tax relief for businesses high on the agenda.
Weekly U.S. jobless claims data could also move markets on Wednesday.
France’s 10-year bond yield FR10YT=RR, was last flat at 3.122%.
(Reuters)