Euro zone bond yields dropped today as a European Central Bank (ECB) survey showed consumers expect inflation to keep slowing, while risk sentiment worsened on sticky inflation in Germany, weak China trade data and pressure on Italian banks.
The ECB’s monthly Consumer Expectations Survey showed the median respondent in the June edition expected inflation to average 3.4% over the next 12 months, down from 3.9% a month earlier, firming expectations the central bank is nearing the end of its tightening cycle.
Yields also saw downward pressure from investors fleeing to the relative safety of sovereign debt from riskier assets.
Bond prices move inversely with yields.
Italian banks came under pressure after Italy’s cabinet approved a 40% windfall tax on lenders.
Deputy Prime Minister Matteo Salvini said the 40% levy on banks’ extra profits will be used for policies such as a reduction of the tax wedge, tax cuts and financial support to holders of mortgages on first homes.
Elsewhere, data showed China’s imports and exports fell much faster than expected in July, with imports down 12.4% from a year earlier while exports contracted 14.5%, in another sign of the country’s faltering economic recovery.
“With the ECB having toned down its hawkishness at the last meeting, it has seemingly lost a grip on the market’s long-term inflation expectations,” said Benjamin Schroeder, Senior Rates Strategist at ING.
Germany’s 10-year government bond yield, the euro area benchmark, fell 10 basis points to 2.46%, a one-week low.
Italian 10-year yields were last down 8 bps at 4.172%, a sharp fall from an almost three-week high hit on Friday.
Investors have been focused also on US government bond markets after Fitch downgraded the US credit rating and the Treasury Department’s announced offering of $103 billion in Treasuries as it faces a growing deficit and the need to balance the overall profile of its debt issues.