European bond prices cling to this week’s inflation-inspired gains

Euro zone bond prices on Thursday held onto most of their recent gains inspired by lower-than-expected inflation data from major European markets, Reuters reported.

Germany’s 10 year yield was 2.298%, up 3 basis points (bps) on the day, but down 24 bps on the week so far. It hit a near three week low of 2.24% on Thursday.

Bond yields move inversely to prices.

That would be the European benchmark’s biggest weekly fall in yield in two months, but there are several potentially market moving events still to come this week, including euro zone regional inflation data, due later Thursday, and U.S. payrolls data on Friday.

The fall in yields earlier in the week came after inflation data in Spain, France and Germany all came in lower than expected.

“Even though inflation still, of course, remains at an elevated level, these data points can nonetheless lead prices higher since the market is breathing a sigh of relief. The narrative driving this development is that central-bank policy is showing an effect,” said analysts at DZ bank.

“Today’s data calendar sets in exactly where yesterday’s trading day left off, featuring above all (euro zone) inflation data.”

While the national figures give a good indication of where headline inflation will land in the currency bloc, focus will be on the core inflation data and what it means for the European Central Bank’s (ECB) interest rate plans.

ECB vice president Luis de Guindos said on Thursday recent data had been positive and a big part of the rate raising journey had been done, but there was still some way to go.

Money market traders are now pricing in a peak in the ECB’s deposit rate in September, from December previously.

September 2023 ECB euro short-term rate (ESTR) forwards were at 3.6%, implying a peak in the ECB deposit facility rate of 3.7%. The December forward peaked above 4% before troubles emerged at U.S. regional banks in March.

Also on Thursday’s docket is the release of the minutes of the ECB’s May meeting, and U.S. private payroll data ahead of Friday’s key jobs numbers.

European bond markets largely shrugged off the U.S. House of Representatives passing a bill to suspend the $31.4 trillion debt ceiling on Wednesday and avoid a catastrophic default, overcoming opposition led by hardline conservatives.

Expectations are that the legislation will also be passed by the U.S. Senate.

Italy’s 10 year yield was up one bp on the day, but down 29 bps this week.

Germany’s two year yield was down 19 bps on the week, and Italy’s two year yield was down 16 bps.