Euro zone bond yields decline after weak US economic data

LONDON, Aug 29 – Euro zone government bond yields dropped on Tuesday as weak US economic data supported expectations the Federal Reserve may at least pause future interest rate hikes.

US job openings fell for a third straight month in July, but conditions remained tight, likely ensuring that the US central bank would keep interest rates high for some time.

Markets anticipate an 86% chance FEDWATCH of the Fed leaving its benchmark overnight interest rate unchanged next month, CME Group’s FedWatch Tool showed, but the probability of a rate hike in November is seen at just over 50%.

In the meantime, the risk-on mood lifting European equities dampened some appetite for safe-haven bonds. Bond prices move inversely with yields.

After central bankers at the Jackson Hole economic symposium in Wyoming on Friday did not provide indications on the direction of monetary policy, some analysts expect euro zone bonds to be range-bound until the euro zone CPI and US labour market data releases.

Germany’s 10-year government bond yield, the benchmark for the euro area, fell 5.5 basis points (bps) to 2.51%, after rising for three consecutive days.

“The question of whether we get more hikes will partly be determined by this week’s data, with several important releases coming up,” said Henry Allen, a Deutsche Bank analyst.

Italy’s 10-year bond yield, the benchmark for the euro area’s periphery, slipped 6.5 bps to 4.17%.

Germany and Spain will release inflation data on Wednesday. France, Italy, and the euro area’s aggregate numbers are due on Thursday.

In the United States, initial jobless claims will be published on Thursday, and monthly employment data on Friday.

A GfK institute survey on Tuesday showed German consumer sentiment in September is expected to fall more than analysts polled by Reuters had forecast, due to declining income expectations and propensity to buy.

Money market bets priced in a slightly below 50% chance of a 25-bp rate hike by the European Central Bank in September, after briefly peaking at around 50% right before the US data.

On Monday, market bets on a rate rise next month nudged up after Robert Holzmann, seen as a hawk on the ECB’s governing council, said he saw a case for raising rates further at the next policy meeting if there are no big surprises in inflation data before then.

Analysts’ views about the tightening path are mixed.

Althea Spinozzi, a strategist at Saxo Bank, said “yields might continue to rise in the upcoming weeks as the market realized that the fight against inflation is not over.”

(Reporting by Joice Alves and Stefano Rebaudo; Editing by Peter Graff, Alison Williams, Susan Fenton, and Paul Simao)