Jan 29 (Reuters) - Euro zone government bond yields dropped on Monday as markets fully priced in a first 25 basis point (bp) rate cut by the European Central Bank (ECB) in April, in a week packed with crucial economic data.
Still, the euro area's benchmark Bund yield was on track to record its first monthly rise since September 2023 as markets scaled back what investors deemed overly ambitious bets on policy rate reductions at the end of 2023.
Some analysts reckoned that soft economic growth and inflation figures from the euro zone, due from Wednesday, could add to expectations for more ECB monetary easing.
ECB euro short-term rate (ESTR) forwards are pricing in 149 bps of rate cuts in 2024 from around 140 bps late on Friday, and fully discount a 25 bp cut in April.
ECB policymakers said on Monday the central bank's next move would be a rate cut, but gave no indication on the exact timing or the trigger for action. ECB hawk Peter Kazimir said it was more likely to come in June than April.
Market participants label as hawks central bank officials who advocate a tight monetary policy to control inflation, while doves are more focused on economic growth and the labour market.
"Together with the open-minded ECB rhetoric, this (a likely decline in inflation and growth data) adds conviction to the aggressive depo (rate) path discounted by ESTR-forwards," said Rainer Guntermann, rate strategist at Commerzbank.
Last week, euro area yields dropped, and markets increased their bets on rate cuts as ECB president Christine Lagarde struck a slightly dovish tone at the press conference following a policy meeting.
"We are expecting GDP data to confirm the euro area is in recession, while we think the inflation data will print to the downside versus consensus on both headline and core inflation," said George Buckley, chief UK and euro area economist at Nomura.
Germany's 10-year bond yields dropped 5.5 bps to 2.24%. They are on track to end the month 21 bps higher.
The U.S. Federal Reserve's Federal Open Market Committee (FOMC) will announce its policy decision on Wednesday at 1900 GMT.
The Fed will wait until the second quarter before cutting rates, according to a Reuters poll, with the move seen in June rather than May, but traders are pricing in around a 50% chance of a March cut, according to CME Group's FedWatch Tool.
"The forward guidance in the (Fed) policy statement is likely to move from a hiking bias to a neutral stance," said Xiao Cui, senior economist at Pictet Wealth Management, who forecasts the Fed to keep rates unchanged.
Italy's 10-year bond yield fell 6 bps to 3.76%. The gap between Italian and German 10-year bond yields was at 150 bps after hitting 149.3 bps last week, the lowest since April 1, 2022.
Analysts said the gradual phasing out of the Pandemic Emergency Purchase Programme (PEPP) reinvestments announced by the ECB in mid-December supported bonds of highly indebted countries. Bond prices move inversely to yields.
The Italian-German yield spread dropped from around 180 bps on Dec. 14 to below 150 bps late last week, while the market pricing of 2024 ECB rate cuts was little changed from 150 bps to around 145 bps over the same period.
The Bank of England (BoE) publishes meeting minutes after its rate decision on Thursday at 1200 GMT. Sweden's Riksbank will announce its policy decision the same day at 0830 GMT.
Citi expects the BoE to keep rates unchanged and reaffirm they will likely remain at restrictive levels for some time, due to inflation risks.
It also sees the Riksbank not taking action on rates and pushing back against pricing of early cuts. (Reporting by Stefano Rebaudo; Editing by Bernadette Baum and Mark Potter) ;))
