Euro Zone bond yields edge lower amidst business contraction data

Euro zone bond yeilds: Euro zone bond yields experienced a slight dip on Wednesday as market participants absorbed data revealing a contraction in euro zone business activity for January. Eyes are now turning to Thursday's European Central Bank meeting for potential insights into the region's economic trajectory.

Germany's benchmark 10-year yield, reflective of the entire euro zone, stood at 2.33 per cent, exhibiting a marginal decrease of around 2 basis points. This retracement followed a 9 basis point surge the previous day, propelling it to a 7-week high.

The year began with a consistent climb in yields, having dipped below 2 per cent in late 2023 amidst expectations of imminent central bank rate cuts, a timeline that has since been revised.

Wednesday's focus was on the release of preliminary composite PMI data, indicating a rise to 47.9 in January from December's 47.6. Although slightly below the 48.0 expectation in a Reuters poll, this marks the eighth consecutive month below the crucial 50 level, signifying a persistent contraction.

Europe remains challenging 

Kenneth Broux, Senior Strategist FX and Rates at Societe Generale, remarked on the soft services PMI, suggesting that Europe remains mired in a challenging economic environment. He emphasised the need for the ECB to comprehend that wage inflation is not a concern when demand is weak and credit conditions are stringent.

Despite concerns about inflation, the ECB has been cautious, with Chief Economist Philip Lane indicating that comprehensive wage data would only be available by June 6, potentially delaying any rate cuts until then. Current market expectations indicate a likelihood of the first rate cut in April.

Italy's 10-year yield exhibited a decline of 5 basis points to 3.87 per cent, surpassing the dip in the German bund yield. This movement contributed to narrowing the spread between Germany and Italy's 10-year yields to 150.5, its tightest since June.

While investors anticipate potential adjustments in ECB language, experts like Broux suggest that Thursday's meeting may be too early for such changes, with a more likely timeline being in March, when the ECB unveils its latest forecasts. Germany's two-year yield and Italy's two-year yield were down by 2 basis points and 3 basis points, respectively.

(with Reuters inputs)