German yields on track for the biggest weekly fall since mid-June
Recasts, adds comments, background
By Stefano Rebaudo
July 26 (Reuters) -German government bond yields were on track for their biggest weekly fall since mid-June after a string of economic data led investors to increase bets on the speed of the European Central Bank monetary easing cycle.
Friday’s U.S figures underscored an improving inflation environment and futures contracts tied to the Federal Reserve's policy rate edged up slightly, reflecting continued confidence in a series of rate cuts starting in September.
Surveys earlier this week showed that German business morale unexpectedly fell in July, and growth in euro zone business activity stalled.
Money markets are currently fully pricing two 25 bps ECB rate cuts and more than a 10% chance of a third easing move in 2024 from less than a 70% chance of two rate cuts early this week. EURESTECBM3X4=ICAP
Germany's two-year government bond yields DE2YT=RR fell 1.5 basis points (bps) to 2.66% and were set for a 11 bps weekly fall, the biggest since the week ending on June 14.
Some analysts argued that a fall in risky assets on Wednesday and Thursday sparked some safe-haven flows into fixed income, propping up bond prices and leading yields down.
Euro zone consumers stopped reducing their inflation expectations in June after four consecutive monthly falls, according to an ECB survey.
Germany's 10-year yield DE10YT=RR, the euro area's benchmark, dropped one bp to 2.40% and was set to end the week down 6 bps.
Some investors remained sceptical about a first Fed rate cut in September although financial markets have fully priced in such a move from the U.S. central bank. FEDWATCH
"While this month’s reading is relatively encouraging, it doesn’t quite give the green light" to the Fed to start loosening policy in September, said Julian Howard, chief multi-asset investment strategist at GAM Investments.
"What makes things so challenging today for the 'disinflationistas' is that the U.S. economy is performing strongly and the labour market – as the last non-farm payrolls showed – is in good shape."
Euro area yields pared their early fall on Thursday after U.S. data showed the economy grew faster than expected.
The premium investors demand to hold French bonds rather than German Bunds DE10FR10=RR tightened slightly to 69 bps.
It rose to 71.70 bps earlier this week, the highest since France's inconclusive election earlier this month, after the far-left La France Insoumise's (LFI) proposal to reverse President Emmanuel Macron's pension reform with support from the far-right Rassemblement National (RN).
Rainer Guntermann, a strategist at Commerzbank, said the yield spreads in euro zone government bonds were responding more to broader risk appetite.
"(Euro zone government bond) spreads are trading aligned with risk sentiment again and are no longer directional to the front-end, as ECB rate cut expectations no longer compensate for the deteriorating macro outlook in case of weaker data," he said in a research note.
Dec24ESTRfwds https://tmsnrt.rs/46jAL2z
Reporting by Stefano Rebaudo and Amanda Cooper; Editing by Sharon Singleton
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