Eurozone government bonds edged higher on Monday, as the absence of unusual US tariff news prompted investors to adopt a wait-and-see attitude ahead of this week’s economic data releases.
Germany’s 10-year bond yield rose 3.5 basis points to 2.5%, but remains near the bottom of its recent range.
The eurozone benchmark is trading at about the same level as it was in early March before the political parties forming Germany’s new government announced plans for massive borrowing and spending, sending the 10-year yield soaring to around 2.9%.
However, yields have since fallen again, in part as investors sought safety in German government bonds after U.S. President Donald Trump announced his sweeping tariff plans.
German government spending returned to the spotlight on Monday when Reuters reported that German Finance Minister Joerg Kukies had asked the European Commission in a letter to grant an exemption from the European Union’s borrowing limit to boost defense spending in the coming years.
But overall, traders remain cautious as they await economic data due this week.
In the United States, PCE inflation and GDP data are due on Wednesday, followed by the April nonfarm payrolls report on Friday.
Investors will be watching the data for signs of the economic impact of disruptions and uncertainty over tariffs, although this batch of data may still be too early to show the full impact.
For now, the market expects the Federal Reserve to keep interest rates on hold at next week’s meeting, but sees about a two-in-three chance of a 25-basis-point rate cut in June.
If this week’s data shows signs of the labor market starting to tighten, money markets could move closer to fully pricing in a rate cut in June, said Kenneth Broux, head of corporate FX and rates research at Societe Generale.
In Europe, inflation data is due including in Spain on Tuesday, as well as in Germany, France and Italy on Wednesday.
Data in line with expectations would reinforce investors’ view that the European Central Bank will continue to cut interest rates to support the eurozone economy.
The latest example is policymaker Francois Villeroy de Galhau's statement on Monday that there is still room for further interest rate cuts in Europe as eurozone inflation continues to decline.
Markets have now priced in a 25 basis point rate cut by the ECB in June, with expectations of at least one or two more rate cuts this year.
Italy's 10-year bond yield rose 2 basis points to 3.61%, while the yield on the interest-sensitive German two-year bond rose 1 basis point to 1.75%.
