Euro Zone bond markets tense ahead of German inflation figures, Fed disclosures

Investor caution peaks: Euro zone government bond investors are exercising caution in the lead-up to crucial economic indicators. Scheduled for Thursday, German inflation data and the release of the Federal Reserve's minutes are poised to provide insights into central bank policies on both sides of the Atlantic.

Presently, Euro zone bonds are experiencing mixed results, with Germany's 10-year government bond yield, the region's benchmark, ticking down by one basis point to 2.05 per cent. Across the Atlantic, US Treasury yields are on the rise in London trade, with the 10-year yield climbing by 3 basis points to 3.97 per cent, following a 2-week high at 4.023 per cent the day before. US traders are adjusting their expectations for 2024 rate cuts, now pegged at 150 basis points, down from over 160 basis points last week.

Market sentiment check

Investor focus is keenly on the US jobs data set for release on Thursday and Friday. ING's Garvey Padhraic highlights that the Federal Open Market Committee's minutes from the mid-December 2023 meeting, slated for release at 1900 GMT, could significantly influence the market. He suggests that the minutes may not echo Fed Chair Jerome Powell's dovish tone at the press conference.

Money markets are currently pricing in 161 basis points of European Central Bank (ECB) rate cuts by year-end, slightly down from 163 basis points. Geopolitical risks are also a source of concern, potentially impacting supply chains and contributing to inflation pressures. Oil prices, which experienced notable movements earlier in the week, have stabilised in Asian trade.

Adding to geopolitical unease, Houthi militants in Yemen, with Iranian backing, have increased attacks on vessels in the Red Sea to express support for the Palestinian group Hamas in its conflict with Israel in Gaza.

Italian bond dynamics

Italy's 10-year government bond yield, a benchmark for the euro area periphery, has seen a 3 basis point increase to 3.75 per cent. The yield spread between Italian and German bonds has widened to 167 basis points, compared to dropping below 160 basis points the previous week. The demand for Italian government bonds has been supported by factors such as the European Central Bank's slower-than-expected plan to reduce the Pandemic Emergency Purchase Programme (PEPP) reinvestment, the European Union allowing more time to cut public debt under the stability pact, and expectations for aggressive rate cuts.

(With Reuters Inputs)