Eurozone yields fall on lower US inflation data

EUROZONE bond yields fell on Wednesday (Jul 12) after US CPI data came in lower than expected, helping reassure investors that there could be an end to inflationary pressure around the world and a peak in central bank rates is in sight.

The yield on Germany’s 10-year Bund traded as much as 7.4 basis points (bps) lower after the data, extending an earlier small decline. It was last at 2.59 per cent, down 6 bps.

The report showed US consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation continued to subside, although probably not fast enough to discourage the Federal Reserve from resuming raising interest rates later this month.

Core inflation also slowed.

“The report is a very, very strong report for the narrative that inflation is about to get back to more comfortable levels in the quarters to come,” said Samy Chaar, chief economist at Lombard Odier.

“We have to look at the US as a leading indicator of what will happen in Europe – there is no reason for European exceptionalism here, though there might be in the UK.

“What this confirms is there is no reason to go for a higher terminal rate.”

Bond yields move inversely to prices, which in most developed markets have been hurt by the relentless pace of global central bank rate hikes.

But after the release of the US data, traders trimmed their bets on the European Central Bank’s terminal rate.

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December 2023 ECB ESTR forwards dropped to around 3.89 per cent after the data from around 3.92 per cent, implying a deposit rate of below 4 per cent by year-end. The deposit rate is currently 3.5 per cent.

US Treasury yields fell too, the US 10-year yield was down 7 bps at 3.91 per cent.

Back in Europe, Italy’s 10-year yield was around 10 bps lower at 4.33 per cent, and at the shorter end of the curve, Italy’s two-year yield dipped 6 bps to at 3.93 per cent, and Germany’s two-year yield fell 5 bps to 3.31 per cent. REUTERS