Euro zone yields set for biggest weekly fall since mid-April, await US data

Zawya

a day ago

Euro zone benchmark Bund yields were on track on Friday for the biggest weekly decline since mid-April as investors focused on the long-term adverse economic impact of U.S. trade policy.
Borrowing costs fell on Thursday on risks of extended policy and economic paralysis.
Germany's 10-year government bond yield, the euro zone benchmark, was last up 2 basis points at 2.53%, after hitting 2.497% a fresh three-week low. It was set for a 4.5 bps weekly drop.
A U.S. appeals court reinstated U.S. President Donald Trump's tariffs on Thursday, leaving Wall Street with no clear direction a day after most of the tariffs were blocked by a trade court.
Markets didn't react on Friday to inflation figures from German states, which painted a mixed picture. National figures will be released at 1200 GMT.
Euro zone bank lending continued to rebound last month, likely reflecting lower interest rates, European Central Bank data showed on Friday.
Investors expect U.S. Personal Consumption Expenditures (PCE) price index data, the Federal Reserve's preferred inflation gauge, later in the session.
"U.S. data may play a more instrumental role for euro rates than domestic data, given that a hit to global risk sentiment can bull flatten the euro curve," said Michiel Tukker, senior European rates strategist at ING.
"Yet with 10-year Bunds trading around the level of swaps, markets are already positioned for more headwinds and uncertainty ahead," he added.
The gap between interest rate swaps and Bund yields was at minus 2.5 bps on Friday. It hit its all-time low at around -16 bps in early March. It was around 25 bps in October 2024, before a German political crisis.
The benchmark 10-year U.S. Treasury yield was flat at 4.42%, after declining on Thursday on soft economic data and fears of prolonged trade policy uncertainty.
Markets price in a 90% chance of an ECB 25 bps rate cut next week. They also indicated a deposit facility rate at 1.70% in December, implying two rate cuts and a 20% chance of a third easing move.
The ECB will almost certainly cut interest rates on June 5, with a more than 70% majority of economists polled by Reuters expecting policymakers to pause for the first time in a year in July despite a weak economy at risk from the U.S.-led trade war.
Italy's 10-year yield rose 2 bps to 3.52%, after dropping to 3.488%, its lowest level in 3 months. It was on track for a weekly drop of 8.5 bps, the biggest since mid-April.
The gap between Italian and German yields was at 96 bps after reaching 89.80 bps on Thursday, its lowest since February 2021.
(Reporting by Stefano Rebaudo. Editing by Mark Potter)