LONDON, 6th August, 2024 (WAM) -- Euro zone government bond yields were mixed on Tuesday after hitting a seven-month low the day before as firmer U.S. data helped ease worries about an imminent recession, but concerns about market volatility remained.
Reuters reported that Germany's 10-year yield was last down 2 basis points (bps) at 2.162 percent, having touched 2.074 percent on Monday, its lowest since 4th January, before recovering to end little changed on the day. Bond yields move inversely to prices.
Market recovery
The recovery in yields gained steam after data showed that the U.S. services sector rebounded from a four-year low in July, with a measure of services employment rising for the first time since January.
That helped ease worries of a recession after Friday's weak U.S. labour market report sparked growth worries and had markets betting on more aggressive central bank easing this year.
Markets had moved to price in 130 bps of rate cuts by the Federal Reserve by year-end, but have trimmed those expectations to around 112 bps.
It was a similar picture for the European Central Bank, where markets had priced as much as 90 bps of additional easing by year-end, or at least three quarter-point cuts.
That now stands at 68 bps, implying two 25 bp moves and around a 72 percent chance of a third.
"The fundamental picture hasn't changed that much," said Sophia Oertmann, government bond analyst at DZ Bank.
"We had the weak employment report and other signs the U.S. economy is slowing down but that's not justification to suddenly price in a peak of 130 bps of easing by the Fed this year. That's clearly too much," Oertmann added.
Japan market leads recovery
Fed policymakers on Monday attempted to calm markets, pushing back on the notion that Friday's weak payrolls report means the economy is in recessionary freefall.
Germany's two-year yield, which is more sensitive to changes in central bank easing expectations, was last up 1.5 bps at 2.348 percent. It hit its lowest level since March 2023 on Monday at 2.151 percent.
The sharp swings in markets were a combination of heavy positioning, unwinding of carry trades, summer illiquidity and geopolitical concerns, according to Jefferies chief Europe economist Mohit Kumar.
This helped amplify the shift in the market perception of the U.S. economy, he said.
"Markets are not yet out of the woods, but at least the indications from Japan this morning look encouraging," said Christoph Rieger, head of rates and credit research at Commerzbank.
A more than 12 percent slide on Monday in Japan's main share index, the Nikkei 225, was mostly reversed on Tuesday, with the index rising over 10 percent.
Japanese leaders on Tuesday tried to assuage concerns about the sharp swings in financial markets, with senior finance officials convening an emergency meeting to discuss the sell-off.
Italy's 10-year yield, the benchmark for the euro zone periphery, fell 3 bps to 3.647 percent, pushing the spread between Italian and Germany 10-year yields to 147.5 bps. On Monday it touched its widest level in more than five weeks at 153.9 bps.