Euro zone bond yields dip as traders assess interest rate outlook

Euro zone bond yields fell slightly on Wednesday after climbing to a 1-1/2-month high the previous day, as traders assessed central banks' possible next moves following robust U.S. data. This week's fall in demand for safe assets pushed bond yields higher, while surprisingly strong U.S. retail data on Monday caused investors to further trim bets on Federal Reserve rate cuts this year, and by extension causing a slight reduction in European Central Bank (ECB) rate cut pricing.

Germany's 10-year bond yield, the benchmark for the euro zone, was last 2 basis point (bp) lower on the day at 2.465%, after hitting the highest level since late February on Tuesday. It has risen since Friday's tumble to 2.318% when investors snapped up safe assets as tensions between Israel and Iran ratcheted higher. Yields move inversely to prices. On Tuesday, top U.S. central bank officials, including Federal Reserve Chair Jerome Powell, backed away from providing guidance on when interest rates may be cut and said monetary policy needed to be restrictive for longer.

On the same day, ECB President Christine Lagarde said the bank would cut rates soon, barring any major surprises, and argued the impact of geopolitical events on commodity prices had not been very significant so far. "European data remains on the weak side, the disinflation trend is still intact in Europe and ECB is set to cut rates in June," said Mohit Kumar, chief Europe economist at Jefferies.

Longer-dated yields fell slightly in the afternoon session. Emmanouil Karimalis, European rates strategist at UBS, said the market is keeping an eye on oil prices and their inflation implications. Oil has risen to around its highest since October on the back of Middle East tensions and an uptick in global growth, but was down around 0.9% on Wednesday.

Italy's 10-year bond yield was last 4 bps lower at 3.874%, after rising to its highest level since March 1 on Tuesday. The German 2-year bond yield, most sensitive to expectations for policy rates, was last 1 bp higher at 2.942%, after briefly rising to an almost one-week high.

Analysts said investors will be watching for a slew of central banks speakers due later in the day, including Lagarde and Bank of England Governor Andrew Bailey. Data on Wednesday confirmed euro zone inflation slowed across the board last month, reinforcing expectations for a ECB interest rate cut in June, even as rising energy costs and a weak euro currency cloud the outlook.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)