Euro zone bond yields drop as investors see less tightening



By Stefano Rebaudo

Oct 4 (Reuters) - Euro zone government bond yields edged lower on Tuesday after the Reserve Bank of Australia (RBA) slowed its pace of rate hikes amid expectations the European Central Bank might take a more cautious policy stance.

Concerns about a further economic slowdown and potential systemic risks due to the impact of higher rates on most indebted countries triggered a correction of bets on terminal rates since the release of euro area inflation data last week.

Australia's central bank on Tuesday surprised markets by lifting interest rates by a smaller-than-expected 25 basis points, although it added that further tightening would still be needed.

Germany's 10-year government bond yield, the bloc's benchmark DE10YT=RR , dropped 2 basis points (bps) to 1.875% after hitting its lowest since Sept. 22 at 1.83%. It reached its highest since end-November 2011 on Tuesday last week at 2.352%.

"The sight of a bond rally when investors smell a whiff of a central bank pivot is something to behold," ING analysts said in a research note.

"The root cause of the recent re-pricing lower in rates can be traced back to two factors: the global economic slowdown and resurgent fears for financial stability," they added.

The ECB's euro short-term rate (ESTR) forward for November 2023 was at around 2.6%, after rising above 3% to 3.158% on Tuesday last week. EURESTECBM9X10=ICAP

But analysts said the recent rally in bond prices might not last.

"Markets remain vulnerable also considering yesterday's Bund recovery was not backed by volumes judging by the notable increase in futures turnover during the past week," Commerzbank analysts said.

"With the release of the ECB account and the U.S. labour market report, some scepticism as to whether yesterday's rally can last until the end of the week appears justified," Unicredit analysts said.

Investors will closely watch data from the U.S. Labor Department report on job openings later in the session. U.S. manufacturing activity grew at its slowest pace in nearly 2-1/2 years in September, and a gauge of inflation at the factory gate decelerated for a sixth straight month, according to data released on Monday.

Italy's 10-year government bond yield fell one bps to 4.2% IT10YT=RR , with the spread between Italian and German 10-year yields widening to 236 bps. DE10IT10=RR

Data on Pandemic Emergency Purchase Programme (PEPP) bond reinvestments due on Thursday will be under the spotlight after it showed significant support for the peripheral bond markets in July after Italy's government led by Mario Draghi collapsed.
Reporting by Stefano Rebaudo, editing by Ed Osmond

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.