Euro zone yields nudge lower as traders balance euro zone and U.S. business activity data

Euro zone bond yields inched lower on Tuesday with the gap between Italian yields and those of Germany and France at around its narrowest in years, as traders digested business activity data from Europe and the U.S.

Germany's 10-year yield, the benchmark for the euro zone, was last at 2.62%, down around one basis point, having hit a a two-week low just below that level in early trade. Trading was fairly muted due to the European summer but German yields nudged off their early lows after data showed business activity in the euro zone grew at a slightly faster pace in July than in June.

Analysts at ING said euro zone economic data seemed to be on a recovering trend, which, in isolation, would send yields higher. However, "although the correlation with U.S. rates decreased significantly since Trump's election, U.S. developments remain a key source of risk to our outlook," they said.

They said it was difficult to see euro rates drifting higher if there were to be a significant rally in U.S. Treasuries. Illustrating that, euro zone yields moved back lower late in the session in line with Treasury yields after data showed U.S. services sector activity unexpectedly flatlined in July.

Complicating the picture for investors trying to process what this means for Federal Reserve policy, the data also showed price pressures continuing to mount. After soft U.S. jobs numbers from Friday, investors are looking for more information about the health of the U.S. economy as they try to assess whether and how much the Fed will cut interest rates this year.

Traders raised bets on the scale of Fed easing after the soft payrolls data, helping Treasuries to rally, as well as European bonds. Italy's 10-year yield was down around 2 bps at 3.45%. After its 7-basis-point drop on Monday, the difference between it and the German yield was at 83 bps - around the tightest since 2010.

Italy's relatively strong economic performance and general optimism across markets and asset classes have been driving that spread tighter in recent years. Italy's spread to France, where political uncertainty and fiscal worries remain a concern for investors, is about 17 bps, its narrowest since 2007.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)