By Harry Robertson
LONDON (Reuters) -Euro zone bond yields posted their largest one-day fall so far this month on Wednesday ahead of U.S. inflation data due out Thursday, and the results of the U.S. midterm elections.
Yields, which move inversely to prices, have soared this year as the European Central Bank (ECB) followed the U.S. Federal Reserve in hiking interest rates to try to cool inflation.
Central banks have dropped hints they might moderate the pace of their aggressive rate hikes as economies start to slow, but bond yields have not strayed far from multi-year highs.
The yield on the 10-year German government bond was down 10 basis points (bp) to 2.17%, set for its largest one-day drop since late October. The 2-year yield also shed 10 bps to trade around 2.11%, after hitting a 14-year high of 2.252% on Tuesday.
Americans went to the polls in midterm elections on Tuesday but votes were still being counted on Wednesday. Early indications suggested the elections went better for the Democrats than expected, although Republicans looked likely to take control of the lower chamber in Congress.
Analysts said the U.S. consumer price index inflation data, due out Thursday, is more important for investors. A stronger-than-expected reading could force the Fed to keep hiking rates hard, adding to pressure on other central banks, but a weaker reading would likely boost financial markets.
“The key driver of the bond market overall is monetary policy, a lot more than fiscal policy, which is what these midterm elections are about,” said Florian Ielpo, a senior multi-asset portfolio manager at Lombard Odier.
He said bond investors were in “wait and see mode” and would scrutinise the inflation data for any signs central banks might slow down.
The 10-year Italian bond yield fell 10 bps to 4.28%. The gap between Italy and Germany’s 10-year yields narrowed 1 bp to 209 bps, reflecting a greater degree of investor confidence.
The ECB raised rates by 75 bps to a 13-year high of 1.5% at the end of October.
“We probably have a couple more hikes at the ECB,” said David Zahn, head of European fixed income at Franklin Templeton. Zahn said he expects rates to peak at around 2.25% to 2.5%.
“Given the economic data coming out is already showing that the euro zone is weakening, they (the ECB) probably don’t have a lot more hikes to do.”
However, economists at consultancy Capital Economics said they expect the ECB to keep hiking interest rates to 3% even as a recession hits, after inflation outstripped expectations and jumped to a record high of 10.7% in October.
(Reporting by Harry Robertson; Editing by Tomasz Janowski, Alexander Smith and Barbara Lewis)
