By Alun John
LONDON (Reuters) -Euro zone bond yields rose on Monday in a partial reversal of the previous week's declines when a string of meetings by major central banks gave investors greater confidence that interest rate cuts will come by the middle of this year.
The main data releases this week are U.S. core PCE inflation due Friday and flash consumer price index releases from Spain on Wednesday, and France and Italy on Friday, though market reaction could be affected by Easter holidays.
Germany's 10-year bond yield was up 5 basis points (bps) on the day to 2.37%. But after the euro zone benchmark yield dropped 11.5 bps last week, it is still is heading for its first monthly fall of 2023.
The MOVE index of volatility in U.S. bond markets hit a two year low on Friday.
Yields, which move inversely to prices, trended higher in January and February as traders pushed back expectations of substantial rate cuts until the middle of 2024, on the back of stronger than expected economic data, particularly in the U.S.
But several central bank meetings last week led markets to become more confident that cuts would come.
The U.S. Federal Reserve kept rates steady but reiterated its projection that it would cut rates by 75 bps by the end of the year; the Bank of England said the UK economy was heading in the right direction for cuts; and, in Switzerland where inflation is lower, the Swiss National Bank surprised markets by reducing borrowing costs 25 bps.
Many European Central Bank policymakers have indicated they expect to start cutting rates in June, and current market pricing is broadly aligned with this, showing little chance the ECB will move at its April meeting, but slightly more than an 80% chance of a cut by June.
"There will be some more data by April, but there will be even more data by June which will help the ECB’s decision-making process," analysts at Natwest (LON:NWG) markets said in a note.
They added that the data did not need to be lower than expected to justify a cut - it "only needs to come in line with expectations for the ECB to cut". They also said that, in their opinion, the ECB could cut rates ahead of the Fed, a widely discussed topic in markets.
As well as overall inflation in the currency bloc, the ECB is particularly concerned about recent rapid wage growth. But chief economist Philip Lane said on Monday the central bank was increasingly confident that wage growth was slowing back towards more normal levels.
Italy's 10 year yield was 5.5 bps higher at 3.69%, after a 6 bp fall last week. The closely watched spread between German and Italian yields was at 130 bps, up from a more than two year low of 115 bps in mid-March.
Germany's two year yield was up 6 bps at 2.87% and Italy's two year yield was up 2.5 bps at 3.42%.