Euro area government bond yields edged lower on Tuesday as global investors looked ahead to the release of key U.S. inflation data, which may influence the future course of the Federal Reserve’s monetary policy.
The report is expected to offer insights into the impact of U.S. tariffs on inflation in June, particularly after earlier readings showed inflation cooling more than forecast.
German Yields Lead the Movement
Germany’s 10-year government bond yield—widely considered the eurozone benchmark—declined by 1 basis point (bp) to 2.71%. Similarly, the 30-year yield also eased by 1 bp to 3.24%, just below the seven-month high of 3.26% reached on Monday.
Meanwhile, the 2-year German yield, which is more responsive to changes in short-term policy expectations, dropped 0.5 bps to 1.87%.
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This resulted in a slight flattening of the yield curve, with the spread between 10-year and 2-year bonds narrowing to 84 bps, down from Monday’s surge of 6.1 bps—its largest one-day increase since April—triggered by higher Japanese yields.
ECB and Fiscal Outlook
Market pricing shows investors expect the European Central Bank (ECB) terminal rate to stay in the 1.75%–1.80% range. However, rising yields on long-dated bonds suggest growing expectations of increased German fiscal spending, potentially altering the longer-term rate landscape.
Italian Bonds Show Stability
In Southern Europe, Italy’s 10-year bond yield declined by 1.5 bps to 3.61%. The spread between Italian BTPs and German Bunds stood at 88 bps, compared to its multi-year low of 84.20 bps recorded earlier in July—signaling reduced risk perception in the eurozone periphery.
Investor Focus: U.S. Inflation
Global bond investors are watching closely as the U.S. Consumer Price Index (CPI) report could influence the Fed’s rate trajectory. A hotter-than-expected print may revive hawkish sentiment, while softer data could support the case for a pause or rate cut.
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