Eurozone government bond yields fell on Monday (Jun 12), with investors gradually scaling back their bets about future European Central Bank interest rate hikes towards 3.75 per cent.

Markets are also awaiting US inflation data, which might deliver fresh clues about the Federal Reserve’s tightening path in a week packed with central bank meetings.

The Fed will end its two-day meeting on Wednesday, while the European Central Bank and the Bank of Japan will deliver their rate decisions on Thursday and Friday, respectively.

Analysts expect the ECB to raise rates by 25 basis points (bps) and to signal that there is more ground to cover, as it wants to avoid delivering dovish signals which might trigger an unwanted easing of financial conditions.

However, most of them maintained their forecasts for the depo rate to peak at 3.75 per cent in July, as the tighter monetary policy is now transmitting strongly into financing conditions, and underlying inflation pressures have started to ease.

Money markets price in an ECB depo rate around 3.77 per cent by autumn, with November 2023 ECB euro short-term rate (ESTR) forwards at 3.67 per cent. It was at 3.71 per cent earlier in the session.

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The German economy could grow between 1.6 per cent to 1.9 per cent next year after expanding by only 0.4 per cent in 2023, Economy Minister Robert Habeck said on Monday.

“We see some portfolio adjustments before the central bank meetings, nothing more,” said Massimiliano Maxia, senior portfolio manager at Allianz GI.

Germany’s 2-year bond yield, more sensitive to expectations for interest rates, dropped 4.5 bps to 2.93 per cent after reaching its highest in almost three months last week at 3 per cent.

The Federal Reserve is expected to pause, but money markets see about a 25 per cent chance of a rate hike on Wednesday after surprise moves in Australia and Canada last week added to the notion that central banks want to avoid ending the tightening cycle prematurely.

“(US) core CPI coming in line with the 0.4 per cent month-on-month consensus would not qualify as progress by any definition but, ironically, most would say this would be good enough for the Fed to skip this meeting,” said Padhraic Garvey, regional head of research, Americas, at ING.

“What is sure is that it is not enough to lower the odds of a July hike,” he added in a note.

Consumer price index (CPI) and producer price index (PPI) data will be released on Tuesday and Wednesday respectively.

Germany’s 10-year yield, the benchmark for the bloc, was down 5.5 bps at 2.33 per cent.

Italy’s 10-year yield, the benchmark for the euro area periphery, dropped 9.5 bps to 4.02 per cent with the spread between Italian and German 10-year yields at 168 bps.

Silvio Berlusconi, the billionaire media mogul and former Italian prime minister, died on Monday aged 86. Although he did not have a role in the current government, his death could potentially destabilise Italian politics in the coming months.

Fitch affirmed Greece’s credit rating at non-investment grade BB+ with a stable outlook late on Friday.

Some market participants recently said the bonds were already trading like investment-grade paper.

The yield spread between Greek and German 10-year yields widened by 7 bps to 131 bps after hitting a fresh 20-month low last Friday at 122 bps. REUTERS