Eurozone yields edge higher amid economic indicators and global uncertainties

Eurozone yields experienced a moderate uptick on Wednesday, aligning with the recent surge in US yields witnessed late on Tuesday. Investors in government bonds, however, remained cautious, awaiting crucial economic data, including German inflation figures, which could offer insights into the European Central Bank's (ECB) monetary trajectory. Additionally, the release of the Federal Reserve's Open Market Committee (FOMC) minutes later in the session added to the anticipation.

Key points

German inflation data awaited: The spotlight is on German inflation data, traditionally influential in shaping bond market sentiments. The figures, scheduled for release on Thursday morning, hold the potential to influence the ECB's policy direction. Eurozone-wide inflation data is slated for release the following day, further contributing to the overall market outlook.

Market pricing and rate cut expectations: Money markets factored in a projection of 159 basis points (bps) for rate cuts by the end of the year, a slight decrease from the 163 bps recorded late on the preceding Wednesday. This comes after markets factored in around 165 bps of rate cuts by the conclusion of the previous year.

Yield movement in Germany and the US: Germany's 10-year government bond yield, serving as the benchmark for the Eurozone, witnessed a 2.5 bps increase, reaching 2.09 per cent. In London trade, US Treasury yields showed an uptick, with the 10-year yield rising by 1.5 bps to 3.96 per cent. The movement followed a two-week high at 4.023 per cent the previous day, coinciding with a reevaluation of rate cut expectations for 2024 by US traders.

Anticipation for US economic data: With an eye on the economic calendar, markets are awaiting US jobs data scheduled for release on Thursday and Friday. Analysts anticipate potential market impact from the FOMC minutes referring back to the crucial December 13 meeting, with expectations of a less dovish stance compared to Fed Chair Jerome Powell's press conference.

Geopolitical factors and oil prices: Investors are keeping a watchful eye on geopolitical risks, with potential repercussions on supply chains and inflation. Oil prices remained relatively stable in Asian trade, reflecting market deliberation on concerns about the US economy versus possible supply disruptions. Geopolitical tensions, such as the increased attacks by Iranian-backed Houthi militants in Yemen, contribute to the prevailing uncertainties.

Italian bond yields and ECB measures: Italy's 10-year government bond yield, a benchmark for the Eurozone periphery, recorded a 4 bps rise, settling at 3.76 per cent. The yield spread between Italian and German bonds widened to 166 bps, reflecting a shift from the levels below 160 bps observed the previous week. Factors such as the ECB's measured approach to reducing the Pandemic Emergency Purchase Programme (PEPP) reinvestment, extended European Union stability pact timelines for public debt reduction, and expectations of assertive rate cuts have been instrumental in sustaining demand for Italian government bonds.

(With Reuters inputs.)