Euro zone bond yields fall as German producer prices cool

BERLIN: Euro zone bond yields dipped on Tuesday as they pared some of Monday's solid rise and reacted to a bigger-than-expected fall in German producer prices. Germany's 2-year bond yield, which is sensitive to interest rate expectations, fell 1.5 basis points (bps) to 3.19%.

The yield rose 4 bps on Monday and briefly hit a three-month high of 3.214% on Tuesday. "This morning we have seen a bit of a recovery" in bond prices, said Christoph Rieger, head of rates research at Commerzbank. Rieger said bonds could be benefiting from a fall in stocks on Monday and Tuesday. When a bond's price rises, its yield falls.

Data on Tuesday showed that the prices German producers receive for their goods and services fell 1.4% in May compared to April, a much bigger drop than the 0.7% fall economists had expected. Rieger said the figures were "probably adding a little bit to the momentum that we are seeing this morning".

He added: "It fits the picture that we're seeing a bit of a retracement. But is this the most important number? No." Germany's 10-year bond yield, the benchmark for the euro zone, was last down 3 bps at around 2.49%, after rising 5 bps the previous day.

The German data adds to signs that euro zone inflation is cooling, after figures released earlier this month showed that inflation in bloc eased to 6.1% in May from 7% in April. However, inflation remains well above the European Central Bank's 2% target, meaning more rate hikes are anticipated.

ECB board member Isabel Schnabel said on Monday it's better to "err on the side of doing too much rather than too little". Italy's 10-year bond yield fell 5 bps to 4.08%, after climbing 9 bps on Monday.

The closely watched gap between Italian and German 10-year bond yields was little changed at 158 bps, after falling to its lowest since the start of April 2022 last week at 150 bps. ECB officials including Vice President Luis de Guindos and Finnish central bank chief Olli Rehn are due to speak later on Tuesday.

Traders expect ECB rates to peak at above 3.9% , from a current level of 3.5%. Those expectations are up from around 3.75% a month ago. Global investors also took note of China's decision to cut its key lending benchmarks on Tuesday for the first time in 10 months, to shore up a faltering economic recovery.

Focus was also expected to turn to Wednesday's testimony from U.S. Federal Reserve Chair Jerome Powell to Congress. Powell's views on the outlook for inflation and any hints on interest rates could move U.S and global markets.