LONDON: Euro zone bond prices fell slightly on Friday ahead of the release of the Federal Reserve’s preferred measure of inflation after hitting their highest in more than nine months the previous day.
Germany’s 10-year bond yield, which moves inversely to the price, was last up 2 basis points (bps) at 1.973%. It fell to 1.94% on Thursday, its lowest since March.
Italy’s 10-year bond yield was also 2 bps higher at 3.598% after falling to its lowest since August 2022 on Thursday at 3.55%.
“It was like the market peaked and then realised, oh, OK, maybe we shouldn’t trade that (high),” said Piet Haines Christiansen, chief rates strategist at Danske Bank.
He added that in the holiday period, “one shouldn’t over-interpret any market moves”.
Euro zone bond yields have tumbled in November and December, with the benchmark German 10-year yield on track for its biggest two-month fall since 2008.
Sharp falls in US and European inflation have allowed central bankers to call time on rate hikes. Investors have started thinking about when rates will fall and are pricing in around 150 bps of cuts from the European Central Bank and Fed next year.
November US personal consumption expenditure index, the Fed’s favoured gauge of price pressures, is due at 1330 GMT and could cause investors to shift their rate-cut bets up or down.
Economists polled by Reuters expect the PCE index rose 2.8% year-on-year, down from 3% in October and a peak of 7.1% in June 2022.
“You could get volatility” in bond markets, Haines Christiansen said. “We’ll get another inflation print before the Fed meeting next time (on Jan. 31). In that sense it’s not going to be the most important release.”
Shorter-dated bonds, which are sensitive to interest rate expectations, were little changed on Friday.
Germany’s 2-year bond yield was last down less than 1 bp at 2.445%, just above a nine-month low of 2.345% touched on Thursday.
The closely watched gap between Italian and German 10-year bonds was last at 161 bps. The gap, a gauge of the risk premium investors demand to hold the bonds of highly indebted Italy, fell to the lowest since June earlier this week at 157 bps.
