LONDON: Italy’s 10-year bond yield was on track for its biggest monthly fall since 2013 on Friday, even as yields ticked slightly higher as traders prepared to log off for the year.
The Italian 10-year yield has fallen 60 basis points (bps) this month as a slowdown in euro zone inflation and the European Central Bank finishing its tightening cycle have caused investors to bet on big rate cuts in 2024. Yields move inversely to prices.
Euro zone bond yields edged higher on Friday in subdued trading, with many market participants off for the holidays.
Germany’s 10-year yield, the benchmark for the euro zone, was last up 5 bps at 1.994% as investors took profits before the start of 2024. It hit a one-year low of 1.896% on Thursday. Italy’s 10-year yield was up 3 bps at 3.479%.
“Investors are taking their breath before buying again into a market that has very limited sellers,” said Florian Ielpo, head of macro at Lombard Odier Investment Management, referring to the recent rally in stock and bond markets.
The German 10-year has fallen 45 bps in December, the most since July 2022. It has dropped 57 bps this year, marking its best year since 2014, after the November and December rally rescued the fixed income market from an almost unheard-of third straight year of declines.
Germany’s 2-year bond yield, which is sensitive to ECB rate expectations, was last up 1 bp at 2.371%. It has fallen 43 bps in December, putting it on track for its best month since 2008.
Investors have ramped up their expectations for ECB rate cuts next year as inflation has cooled and central bankers have struck a softer tone.
They expect borrowing costs to fall by around 165 bps in 2024 and an almost 80% chance of the first cut coming in March, according to money market prices.
“Personally I’m a little bit sceptical why (yields) should move lower from here,” said Emmanouil Karimalis, rates strategist at UBS.
Karimalis said governments will be selling lots of debt next year and that January is typically a busy period for issuance that could put pressure on yields.
The gap between Italy and Germany’s 10-year bond yields was last at 162 bps. The spread, a gauge of investor sentiment towards the euro zone’s more indebted countries, fell to its lowest since June on Wednesday at 154 bps.
