Eurozone government bond yields rose on the first trading day of 2024 but remained within striking distance of multi-month lows as money markets discounted around 160 basis points of policy rate cuts this year.

Germany’s 10-year yield, the benchmark for the euro area, has fallen 55 bps in 2023 – the biggest drop since 2014 – with almost all the fall in November and December as inflation slowed more than expected, and the European Central Bank signalled its rate-hiking cycle was close to an end.

Bond traders mentioned outsized moves based on thin liquidity in the last weeks of December when the Bund yield dropped below 2 per cent before reversing sharply above that threshold.

German real yields fell into negative territory at the end of December for the first time since August before hitting -0.075 per cent, their lowest level since June 1.

They were last at 0.051 per cent on Tuesday.

“We consider negative 10 year real Bund yields ambitious with aggressive ECB cuts priced in, said Hauke Siemssen, rate strategist at Commerzbank.

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Bund yield was last up 5 bps to 2.082 per cent. Last week, it hit 1.896 per cent, its lowest level in over a year.

December 2023 forwards on ECB euro short-term rate (ESTR) were at 2.28 per cent, implying expectations for a depo rate at 2.38 per cent by year-end and 162 bps of cuts from 165 bps late last week.

European Central Bank Governing Council member Robert Holzmann recently said it was too early to talk about lowering borrowing costs, and such a move in 2024 is anything but certain, while policymaker Isabel Schnabel said the ECB has a way to go before bringing inflation down to its 2 per cent goal.

Commerzbank’s Siemssen mentioned supply implications, which could place downside pressure on bond prices this week.

“A busy and duration-intensive syndication pipeline seems ahead with euro area government bonds auction volumes picking up again,” he argued. Bond prices move inversely with yields.

Investors’ focus will quickly shift to euro area inflation data, with Thursday’s German figures setting the tone for financial markets.

Analysts expected price pressures in Germany would remain high at the start of the year, as a temporary cut in value-added tax for gastronomy services expired, and CO2 taxes rose, but they didn’t rule out downside surprises.

Italy’s 10-year government bond yield, the benchmark for the euro area’s periphery, rose 5 bps to 3.76 per cent. Last week, it hit 3.468 per cent, its lowest level since August 2022.

The gap between Italian and German 10-year bond yields was at 166 bps after recently hitting a 6-month low of 154.10 bps.

A slower-than-expected reduction in Pandemic Emergency Purchase Programme (PEPP) reinvestments, a European Union stability pact allowing more time to cut public debt and expectations for aggressive rate cuts, supported demand in Italian government bonds. REUTERS