PHOTO
Euro zone bond yields rose on Monday after falling for four consecutive sessions, as traders slightly reduced their bets on European Central Bank and Federal Reserve rate cuts.
Germany's 10-year bond yield, the benchmark for the euro zone bloc, rose 6 basis points (bps) to 2.23%. Yields move inversely to prices.
The benchmark yield fell 12 bps last week as data showed the U.S. labour market was cooling. This week, investors are looking to U.S. inflation data due on Wednesday and a European Central Bank interest rate decision on Thursday.
Markets are still digesting Friday's U.S. employment report, which showed growth in non-farm payrolls was lower than expected in August while the unemployment rate fell to 4.2% from 4.3%.
Stocks rose on Monday, after falling last week, meaning some money was likely leaving bond markets and going into equities.
Traders in money markets think the Fed is certain to lower rates by at least 25 bps later this month. The chance of an outsized 50-bp rate cut from the Fed fell to around 25% on Monday from as high as 50% on Friday.
"Rates traders are pushing back against the idea of a 50 bp Fed cut this month," said Kit Juckes, chief FX strategist at Societe Generale.
"There's no doubt the U.S. economy is slowing, but by the same token, no reason to label it a hard landing yet."
Germany's two-year bond yield, which is more sensitive to ECB rate expectations, was up 5 bps at 2.276%, after falling 16 bps the previous week.
Traders on Monday expected around 63 bps of further ECB rate cuts this year, down from as much as 67 bps on Friday.
Italy's 10-year yield was 6 bps higher at 3.61%, leaving the gap between Italian and German bond yields little changed at 137 bps.
The ECB is widely expected to cut rates by 25 bps on Thursday to 3.5%, after lowering borrowing costs by the same amount for the first time in five years in June.
"We doubt the Governing Council will provide a lot of guidance beyond September, and expect it to re-emphasize a data-dependent posture," said Konstantin Veit, portfolio manager at PIMCO. "Market pricing seems reasonable."
U.S. inflation data this week could move markets. It is expected to show price pressures in the U.S. remain subdued, with a 0.2% month-on-month rise forecast by economists.
(Reporting by Harry Robertson; Editing by Jamie Freed and Christina Fincher)