What triggered the 11-week high in the euro area benchmark Bund yield? The spike in Germany’s 10-year bond yield to a peak of 2.415% was prompted by unexpectedly high U.S. inflation data, which subsequently adjusted market expectations for central bank rate cuts.
On Tuesday, eurozone government bond yields sharply increased, a move that seemed to echo the trajectory of bonds in the United States. This uptrend came as markets absorbed U.S. inflation data that came in hotter than anticipated, challenging the prevision of imminent rate cuts by central banks.
Germany’s 10-year bond yield, the euro area’s bellwether, ascended to around 2.40%, reaching a high of 2.415% right after the data was publicized—the highest since early December. Similarly, Germany’s two-year yield, highly responsive to interest rate forecasts, climbed about six basis points to 2.76%, marking an 11-week apex after the inflation announcement.
The U.S. Consumer Price Index (CPI) showed a month-on-month increase of 0.3% in January, topping the 0.2% economists expected in a Reuters poll. On an annual basis, the CPI advanced 3.1%, overtaking the 2.9% projected growth. The rise in costs for shelter and healthcare contributed significantly to this escalation.
It’s notable that European rate expectations and government bonds have been tracking closely with their U.S. counterparts in recent months, even as Europe’s economic growth data lags behind the United States. Post-inflation data, the market’s outlook has shifted, indicating that the Federal Reserve may hold off rate cuts until at least June, a departure from the previously anticipated May cut.
The alteration in perspective wasn’t limited to the U.S. Traders scaled back on their bets for European Central Bank monetary relaxation, showing around 110 basis points of cuts expected in 2024, which is about 10 basis points less than before the U.S. data release, while also pointing to a roughly 60% chance of an ECB rate cut as early as April.
Peter Cardillo of Spartan Capital Securities remarked on the inflation report, saying it was hotter than expected and it underscored the Federal Reserve’s cautious stance on declaring victory over inflation. He warned that if inflation remained elevated, the likelihood of a June rate cut would diminish, pushing expectations further into the year.
The Italian government’s 10-year bond yield similarly edged higher, with the yield spread between Italian and German 10-year bonds widening significantly immediately after the U.S. data, although it had been narrowing over recent months. This spread serves as a measure of risk perception among European countries with higher debt levels.
In essence, the bond market movements in Europe, closely mirroring those in the U.S., reflect a growing sentiment amongst investors, who are recalibrating expectations in the wake of new economic data. The reactions in the eurozone bond yields are a stark reminder of the global impact of U.S. monetary policy decisions and the interconnectedness of international financial markets.
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