Euro area sovereign bond yields dropped on Monday, with investors reckoning markets broadly priced in a higher-for-longer outlook for policy rates while new data confirmed inflation in Germany was falling.
Consumer prices in the German state of North Rhine-Westphalia (NRW) fell by 0.1 % month-on-month in October and were up by 3.1 % year-on-year.
"German CPIs will be in focus today, and the NRW release this morning, following the early release from Brandenburg and Berlin on Friday, point to downside risks for the already benign consensus," said Hauke Siemssen, rate strategist at Commerzbank.
The pan-German consumer price will be published later in the day. The German state of Brandenburg released data on Friday.
Germany's 10-year yield, the benchmark for the euro area, was down 6 basis points (bps) at 2.782%. In early October, it hit 3.024%, its highest level in 12 years.
Spain's 12-month inflation in October was unchanged from the previous month at 3.5%.
Citi analysts said in a note to clients that their "Bund yield forecasts adopt a neutral stance near-term with a frontloaded rally in 2024."
They also flagged an "end-cycle tendency for the market to underprice subsequent (policy rate) cuts." Long-dated yields rose sharply in the last few weeks in a U.S. Treasury-led bond selloff as markets adjusted their positioning to a higher for longer rate outlook and an increase of the so-called term premium – the excess return an investor requires for holding a longer-term bond over short-term investments. Bond prices move inversely with yields.
Investors await the outcome of the Federal Reserve policy meeting due late on Wednesday, while there is a large consensus the cooling inflation will likely keep the U.S. central bank on pause in coming months. Traders still price in no chance the Fed will lift its policy rate from the current 5.25%-5.5% range.
Italy's 10-year yields, the benchmark for the euro area's periphery, dropped 7.5 bps to 4.73%.
The gap between Italian and German 10-year yields -- a gauge of the risk premium investors ask to hold debt of the euro zone's most indebted countries -- dropped to 194 bps, its tightest level in around a week.
Furthermore, fears about the conflict in the Middle East supported the appetite for safe-haven sovereign bonds.
Stocks were mixed on Monday as Israel's push into Gaza stirred fears of a wider conflict.
(Reporting by Stefano Rebaudo, editing by Angus MacSwan) ;))