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Euro zone bonds track Treasury rally as U.S. CPI moderates

08/10/2022 | 07:04am EDT

LONDON, Aug 10 (Reuters) - Euro zone bond yields fell on Wednesday after a lower-than-expected U.S. inflation print for July dampened expectations for a 75 basis-point Federal Reserve rate hike in September and slightly weakened money market bets on ECB policy action.

The U.S. Consumer Price Index (CPI) was unchanged last month after advancing 1.3% in June. Economists polled by Reuters had forecast a 0.2% rise.

U.S. Treasury borrowing costs plunged after the data, taking 10-year yields as low as 2.67% while two-year yields were down 15 basis points by 1520 GMT at 3.13%.

European bond markets tracked those moves, with Germany's 10-year yield falling as much as 8 basis points (bps) immediately after the data. After briefly recouping some of the fall, it stood 4 bps lower by 1515 GMT at 0.88%.

Germany's two-year yield fell from around 0.61% before the data to as low as 0.506%, and last stood at 0.52% or 5 bps down on the day..

The softer U.S. data contrasts with soaring euro zone inflation, which hit another record high in July. With peak inflation possibly still months away, the European Central Bank is under pressure to opt for another big interest rate increase in September.

Money markets still price nearly a full probability of a 50 bps move in September, Refinitiv data showed. But they now see 106 bps of ECB hikes by December versus 113 bps prior to the U.S. data.

"There’s enough difference in inflationary pressures between the United States and Eurozone to mean that...near-term ECB expectations don't change much. But understandably the market has still priced a slightly lower ECB terminal rate after the data," said Peter Mccallum, rates strategist at Mizuho.

Still that was enough to buoy regional bond markets, with 10-year yields in Italy, arguably among the most vulnerable to higher rates, dropping seven bps to 2.98%

The euro gained over 1% on the dollar, hitting a five week high of $1.03465, while Europe's pan-European STOXX 600 equity index rose almost 1%, having traded flat early in the day.

Credit markets also rallied, with the iTraxx Europe Crossover Index, which measures the cost of insuring exposure to European high yield bonds, falling to 497 bps, compared to 516 bps before the data.

(Reporting by Lucy Raitano Editing by Yoruk Bahceli, Mark Potter and Emelia Sithole-Matarise)


© Reuters 2022
Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / EURO (AUD/EUR) -0.02% 0.6531 Delayed Quote.3.70%
BRITISH POUND / EURO (GBP/EUR) -0.02% 1.1381 Delayed Quote.-4.52%
BRITISH POUND / US DOLLAR (GBP/USD) 0.00% 1.116 Delayed Quote.-17.43%
CANADIAN DOLLAR / EURO (CAD/EUR) -0.01% 0.737975 Delayed Quote.6.84%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.00% 0.7227 Delayed Quote.-7.61%
EURO / US DOLLAR (EUR/USD) 0.01% 0.9801 Delayed Quote.-13.80%
INDIAN RUPEE / EURO (INR/EUR) 0.18% 0.012519 Delayed Quote.5.97%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.04% 0.01227 Delayed Quote.-8.60%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.00% 0.5594 Delayed Quote.-16.03%
US DOLLAR / EURO (USD/EUR) -0.01% 1.020304 Delayed Quote.15.68%
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