Euro zone bond yields fall after PMI, focus on ECB

<html xmlns=""><head><title>UPDATE 3-Euro zone bond yields fall after PMI, focus on ECB</title></head><body>

Adds U.S. economic survey details, updates prices

By Stefano Rebaudo and Harry Robertson

Jan 24 (Reuters) -Euro zone government bond yields fell on Tuesday, as investors tried to assess the European Central Bank's (ECB) future monetary tightening path.

Analysts said German government bonds had factored in recent declines in inflation, but had not yet adjusted to an improvement in growth prospects, leaving room for yields ro rise again.

Euro zone business activity made a surprise return to modest growth in January, a closely-watched survey showed. The data added to signs the bloc may escape recession.

ECB policymakers laid out diverging views on future interest rate hikes on Monday, suggesting that moves beyond next week's expected half a percentage point increase remain contentious.

Germany's 10-year government bond yield DE10YT=RR, the bloc's benchmark, fell 2 basis points (bp) to 2.176%. It hit its highest level since July 2011 on Jan. 2 at 2.569%.

The yield rose as much as 2 bps after the release of U.S. survey data which suggested the economic picture has improved in January. It hit its highest in more than a week at 2.224%, but then quickly retreated.

Lower global energy prices and a slowdown in inflation have spurred bets that central banks may soon ease the pace of their interest rate increases, driving the 10-year Bund yield as low as 1.967% on Jan. 18.

Economists polled by Reuters expect the ECB to deliver 50 bp interest rate rises at each of its next two meetings.

Financial markets expect the main policy rate to peak at 3.3% in August 2023, judging by forward interest rate swaps EUESTECBF=ICAP. That is a step down from December, when traders bet that rates would peak at 3.5%.

ING strategists said in a note they identified 2% for Bund yields and 2.5% for euro swaps as "the likely bottom of the range for EUR rates this year".

"We think ECB policy will be instrumental in enforcing it, at least before the midway point of 2023," they said.

The euro 10-year interest rate swap EURAB6E10Y= was at 2.766%, down 2 bps on the day. It hit an almost 7-week low at 2.48% on Jan 18.

"Bunds are exhibiting relative strength with swap spreads widening," Christopher Rieger, head of interest rate research at Commerzbank said. "As risk sentiment remains resilient, speculation about lower availability of collateral over Lunar New Year may be at play."

Italy's 10-year government bond yield IT10YT=RR fell 6 bps to 3.953%.

The spread between Italian and German 10-year yields DE10IT10=RR - a gauge of the risk premium for the bonds of more highly indebted countries in the euro zone – was at 176 bps. It hit its tightest since April 2022 at 163.8 bps on Jan. 19.

Reporting by Stefano Rebaudo and Harry Robertson; Editing by Jan Harvey, Mark Potter and Emelia Sithole-Matarise


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