Euro zone bond yields steady as traders assess interest rate outlook

The European bond market saw a pause in yield movements on Wednesday, March 18, 2020, as investors weighed the implications of recent economic data and central bank statements on the interest rate outlook. The yield on the benchmark 10-year German Bund stood at -0.30%, only slightly changed from the previous day and close to its highest level in the past year. Similarly, yields on other eurozone government bonds remained relatively stable.

The recent decline in demand for safe assets, such as government bonds, had contributed to the rise in yields earlier in the week. This trend was driven by upbeat economic data from the United States, which led investors to reassess their expectations for interest rate cuts from major central banks, including the European Central Bank (ECB) and the Federal Reserve (Fed).

On Monday, March 16, the release of stronger-than-expected retail sales data in the United States caused investors to trim their bets on the number of rate cuts the Fed would implement in 2020. The data showed an unexpected increase of 0.3% in retail sales in February, which was significantly higher than the forecasted decline of 0.1%. This improvement in the retail sales data suggested that the US economy might be recovering more quickly than anticipated from the coronavirus-induced downturn.

As a result of the revised expectations regarding the Fed's monetary policy stance, the pricing for ECB rate cuts also saw a slight reduction. The ECB had previously signaled that it would consider implementing further stimulus measures if needed to support the eurozone economy during the coronavirus crisis. However, the recent market developments might lead the ECB to reconsider the extent and timing of any additional easing measures.

On Tuesday, March 17, top US central bank officials, including Federal Reserve Chair Jerome Powell and Vice Chair Richard Clarida, spoke at the National Association for Business Economics virtual conference. Both Powell and Clarida emphasized the importance of maintaining the current accommodative monetary policy stance and the need to be prepared to take further action if necessary to support the US economy during the coronavirus crisis. Their statements did little to alter the market sentiment regarding the Fed's rate cut expectations.

In summary, the eurozone bond market experienced a pause in yield movements on Wednesday as investors assessed the implications of recent economic data and central bank statements on the interest rate outlook. The decline in demand for safe assets earlier in the week had pushed bond yields higher, while the surprisingly strong US retail sales data and the statements from top US central bank officials caused investors to reconsider their expectations for interest rate cuts from major central banks, including the ECB and the Fed.