Euro zone bond yields modestly higher before Fed minutes
By Samuel Indyk
LONDON, Feb 21 (Reuters) - Euro zone bond yields were modestly higher on Wednesday before the minutes from the Federal Reserve's January meeting, which should provide hints at the future policy path as markets rein in bets for Spring rate cuts.
Germany's 10-year bund yield, the benchmark for the euro area, was last up 2 basis points (bps) at 2.393%, near Friday's 2-1/2 month high of 2.422%.
The policy-sensitive two-year yield was up 0.5 bps at 2.8016%.
"The highlight of the day will be the Fed minutes," said Sebastian Grupp, fixed income analyst at DZ Bank.
"Otherwise, there are not big drivers today and we could see sideways movement in Europe," Grupp added.
The Fed left its target range for the Fed funds rate unchanged at 5.25%-5.5% at its January meeting, while dropping its bias to tighten policy.
A slight majority of economists surveyed by Reuters expect the Fed begin cutting interest rates at the June meeting.
Meanwhile, a slight moderation in negotiated wages in the euro zone in the fourth quarter, announced on Tuesday, would have been welcomed by policymakers, but analysts said it would be unlikely to change the needle in terms of rate cut timing.
"It's a good sign that wage growth has come down," said DZ Bank's Grupp. "But 40% of observed wages will be negotiated in the next three months. The European Central Bank will want to wait for that data to come in."
Money market traders were now pricing in the first quarter-point interest rate cut from the ECB in June. A March rate cut had been baked into expectations at the start of the year.
Investors were also expecting about 106 bps of cuts this year, or around four 25 bp moves, having priced as much as 150 bps of easing at the end of 2023.
Despite a repricing of rate expectations for the ECB, Italian bonds, or BTPs, have outperformed German peers this year.
The spread between Italian and German 10-year yields , a gauge of risk premium, traded close to its tightest level since March 2022 at 147 bps.
UniCredit analysts said the performance of Italian bonds has been "remarkable" given markets have reined in rate cut expectations and there's been heavy supply, yet they do not expect a widening of the spread.
"Considering that investors still see rate cuts as a matter of when rather than if, we think it is hard to see factors that could put widening pressure on BTPs," UniCredit analysts said in a note.
Italy's 10-year yield, the benchmark for the euro area periphery, was last up 2 bps at 3.881%. (Reporting by Samuel Indyk Editing by Peter Graff)
