Eurozone bond yields hold firm ahead of crucial inflation figures

Yields hold steady: Eurozone bond yields remained steady today after an initial increase earlier this week, as investors awaited crucial inflation data set to be released later this week.

The yield on Germany's 10-year bond stayed unchanged at 2.431 per cent after experiencing a 7 basis points rise on Monday, maintaining its position near December's highs. Meanwhile, the 2-year yield, sensitive to European Central Bank rate expectations, decreased by 1 basis point to 2.911 per cent, also close to its three-month peak.

Despite subdued lending in the eurozone in January, which was revealed in Tuesday's data, bond yields seemed unaffected. The European Central Bank reported a modest 0.2 per cent increase in banks' loans to firms, following a revised 0.5 per cent uptick in December 2023.

Rate cut expectations

Investors have moderated their forecasts for central bank interest rate cuts this year, especially with stronger-than-anticipated economic data from the United States. Central bankers have cautioned against expectations of significant rate cuts, emphasising the ongoing battle against inflation and the importance of data in shaping policy decisions.

Market focus remains on the upcoming US inflation data later this week, with correlations between eurozone and US bond yields currently at peak levels due to their shared inflation trajectories.

Thursday will see the release of US personal consumption expenditures inflation data, expected to show a decrease to 2.4 per cent year-on-year (YoY) in January from 2.6 per cent in December. Eurozone country-level inflation figures for February will also be unveiled throughout Wednesday and Thursday, culminating in the euro zone-wide release on Friday, anticipated to show a decline in headline inflation to 2.5 per cent YoY from January's 2.8 per cent.

Italian bond movement

Italy's 10-year bond yield edged up by 1 basis point to 3.893 per cent, while the spread between Italian and German 10-year bonds slightly narrowed to 145 basis points, indicating improved investor confidence in Italy and the eurozone's heavily indebted nations.

Notably, orders for Italy's new six-year BTP Valore retail bond have reached a total of 7 billion euros, as indicated by Tuesday's data.

Market sentiment suggests an expectation of approximately 93 basis points of rate cuts from the European Central Bank this year, slightly higher than Monday's projection but notably lower than the figures at the beginning of February.