Euro zone sovereign bond yields fall, tracking US Treasuries

BY Reuters | ECONOMIC | 11/28/23 11:25 AM EST

By Harry Robertson

LONDON, Nov 28 (Reuters) - Euro zone bond yields dropped on Tuesday tracking moves in U.S. Treasuries, with the focus on speeches from European Central Bank officials and inflation data due later in the week.

Germany's 10-year bond yield was down 6 basis points (bps) at 2.49%, after falling 9 bps on Monday. Yields fall as bond prices rise, and vice versa.

U.S. Treasury yields dropped after Federal Reserve Governor Christopher Waller flagged the possibility of lowering the Fed policy rate in the months ahead if inflation continues to fall.

Benchmark 10-year U.S. yield fell 3.5 bps to 4.35%.

Yields in Europe and the U.S. have tumbled since hitting their highest levels in more than a decade in October, as a slowdown in inflation has made further interest rate hikes less likely. Germany's 10-year yield has dropped from a 12-year high of 3.024% in early October.

Italy's 10-year bond yield was last down 4.5 bps at 4.25% on Tuesday after falling 10 bps on Monday. It is down from 5.025% last month, an 11-year high.

The gap between Italy and Germany's 10-year bond yields was last up 3 bps at 175 bps. It fell to a two-month low of 170 bps earlier in November.

Strategists at Societe Generale said the rise in the spread was likely because ECB officials have started to talk more about the ECB's pandemic-era bond holdings. Maturing debt from the holdings is currently being reinvested, supporting euro zone bond markets.

ECB President Christine Lagarde said on Monday that the central bank may soon discuss whether to end reinvestments early in its 1.7 trillion euro ($1.86 trillion) Pandemic Emergency Purchase Programme, or PEPP. Current policy is that reinvestments continue until at least the end of 2024.

German central bank chief Joachim Nagel on Tuesday advocated a "significantly" smaller balance sheet.

"We say (the spread) is going to widen to 215 bps in the second quarter and then come down afterwards," as credit conditions tighten across the euro zone, said Sean Kou, rates strategist at Societe Generale.

Inflation data for the euro zone is due out on Thursday and economists expect that price growth cooled to 2.7% year-on-year in November, from 2.9% in October.

Lagarde will deliver a pre-recorded message at a conference later on Tuesday, and ECB Chief Economist Philip Lane is also due to speak in the U.S. on Tuesday.

German inflation data will be released on Wednesday. U.S. personal consumption expenditure inflation, the Federal Reserve's preferred measure, is due on Thursday after the euro zone numbers.

Germany's 2-year bond yield, which is sensitive to ECB rate expectations, was last down 6.5 bps at 2.92%.

Survey data on Tuesday showed that German consumer sentiment improved slightly heading into the Christmas period but remained at very low levels.

Separate figures showed that lending to euro zone firms dipped into negative territory in October for the first time since 2015.

Investors expect around 90 bps of interest rate cuts from the ECB next year, according to pricing in derivatives markets. Expectations have bounced around that level since the start of November.

($1 = 0.9128 euros) (Reporting by Harry Robertson, additional reporting by Stefano Rebaudo; Editing by Ed Osmond, Frances Kerry and Christina Fincher)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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