Euro zone bond yields inch lower amidst Fed meeting anticipation

Euro zone bond yields: Euro zone government bond yields experienced a slight decline on Monday as investors adopted a cautious stance ahead of the Federal Reserve's policy meeting and awaited the bloc's inflation data. This caution follows a scaling back of bets on potential European Central Bank rate cuts observed last week.

Market movements within the euro area's fixed-income sector have mirrored shifts in US Treasuries, with attention particularly drawn to the yield gap between the Bund and the 10-year Treasury, indicating expectations regarding the diverging paths of ECB and Fed policies. Currently standing at 208 basis points, this gauge previously reached 220.92 in mid-April, marking its highest level since the close of 2019.

Germany's benchmark 10-year government bond yields experienced a modest decrease of 1.5 basis points, settling at 2.56 per cent. This comes after reaching 2.647 per cent on Thursday, its highest level since November's conclusion.

In the realm of monetary policy expectations, money markets have discounted 68 basis points of ECB monetary easing for the year 2024, implying the likelihood of two 25 basis point rate cuts, with a roughly 70 per cent chance of a third adjustment by year-end. This represents a marginal shift from the 67 basis points discounted late on Friday.

Meanwhile, Germany's 2-year yields, known for their sensitivity to policy rate projections, observed a marginal decline of one basis point, reaching 2.98 per cent. These movements underscore the cautious sentiment prevailing among investors as they await crucial policy decisions and economic data releases in the coming days.

(with Reuters inputs)