Euro zone bond yields extend slide after UK inflation slows
Germany's 10-year bond yield, the bloc's benchmark, fell to 2.285% after the data was released, its lowest since June 2.
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LONDON: Euro zone bond yields dropped for a third straight session on Wednesday after data showed British inflation cooled more than expected in June, adding to signs that price pressures are easing globally. Germany's 10-year bond yield, the bloc's benchmark, fell to 2.285% after the data was released, its lowest since June 2.
It was last down 2 bps at 2.329%, having ticked up after data showed core euro zone inflation slowed slightly less than the preliminary estimate suggested in June. Meanwhile, Italy's 10-year yield was last down 2 bps at 3.994%, after touching its lowest since June 27 at 3.94%. Yields move inversely to prices.
Global bond yields have fallen sharply in recent days, since a lower-than-expected U.S. inflation print sparked hopes that central banks will not have to raise interest rates as high as previously expected. Germany's 10-year yield hit a four-month high of 2.679% last week before dropping sharply, with weak Chinese growth figures adding to sentiment central banks cannot push rates much higher.
British inflation data underpinned the positive mood on Wednesday. It showed year-on-year inflation at 7.9% in June. That was down from 8.7% in May and below economists' expectations of an 8.2% reading. UK inflation is "the key driver" of euro zone bond markets on Wednesday, said Rainer Guntermann, rates strategist at Commerzbank.
"That fits nicely into the picture we've seen in Europe over the last few days," he said. "The market was already having a bit of a rethink about the ECB rate decision in September." The European Central Bank raised rates to 3.5% in June and sets them again next Thursday.
Guntermann said he expects a 25 bp increase to 3.75% to be the last of this cycle, and for rates to be left at that level for the rest of the year. Germany's two-year bond yield, which is sensitive to rate expectations, was last down 4 bps to 3.141%. It fell to 3.097%, its lowest since June 15, earlier in the session.
According to pricing in derivatives markets, traders expect ECB rates to peak at around 3.91% in December, down from above 4% last week. A speech by ECB governing council member Klaas Knot on Tuesday was also a factor weighing on yields, analysts said.
Knot, president of the Dutch central bank, told Bloomberg TV that rates will rise this month but that anything beyond July is "by no means a certainty". The closely watched gap between Italy and Germany's 10-year borrowing costs narrowed slightly to 166 bps on Wednesday.
