Dec 12 (Reuters) - Euro zone benchmark Bund yield neared an 8-month low on Tuesday ahead of U.S. inflation data due later in the session and after British figures showed a weakening labour market.
U.S. payroll data released on Friday ended a bond rally and a sharp repricing of expectations for future policy rates, which led money markets to discount up to 150 basis points of European Central Bank rate cuts in 2024.
German wholesale prices fell by 3.6% in November compared to last year.
Germany's 10-year government bond yield, the euro area's benchmark, dropped by 5 basis points (bps) to 2.21%. It hit 2.166% on Friday, its lowest since April 6, before rising to 2.286% on Monday.
Bond prices move inversely with yields.
British wage growth slowed by the most in almost two years, official data showed on Tuesday, driving 10-year yields down 11.5 bps to 3.96%.
Money markets are pricing 135 basis points of rate cuts from the European Central Bank (ECB) in 2024, down from around 150 bps on Dec. 6. They were pricing cuts of 80 bps at the end of November.
Investors are braced for two days packed with central bank policy meetings. The Federal Reserve decision on rates is due late on Wednesday, while the European Central Bank and the Bank of England will meet on Thursday.
"While the Fed is likely to lean dovish tomorrow in statement wording, forecasts, and dots, today's U.S. CPI release could yet set up for a hawkish sounding Powell at tomorrow's presser," Jamie Searle, European rates strategist at Citi, said in a research note.
"Bunds still look 'cheap' (to the tune of 16 bps) in our fair value regression dominated by inflation risk premium and the policy outlook," he added.
Analysts forecast rates to be unchanged and a cautious counter-reaction against the recent dovish repricing of policy rates from the ECB.
"We expect the ECB to push back against hopes for a first cut in March 2024 already," said Holger Schmieding, chief economist at Berenberg Bank.
Money markets discounted a 70% chance of a cut in March after fully pricing it on Dec. 5.
"We expect the ECB to ditch the promise to reinvest maturing Pandemic Emergency Purchase Programme (PEPP) bonds until at least the end of 2024 by saying that reinvestments will be curtailed and eventually stopped over the course of 2024 already," Berenberg's Holger added.
ECB president Christine Lagarde deemed PEPP reinvestments the first line of defence against any fundamentally "unwarranted" widening of yield spreads within the eurozone, as the central bank could use them to buy the sovereign bonds of most indebted countries.
Italy's 10-year yields, the benchmark for the euro area periphery, were down 7.5 bps at 3.98%. The spread between Italian and German 10-year yields – a gauge of the risk premium investors ask to hold bonds of the most indebted countries – was at 178 bps after falling to 170 bps.
Investors await the outcome of the negotiations for the reform of the European Union fiscal governance – the Stability and Growth Pact – as too tight post-pandemic budget rules could challenge the resilience of the yield spreads of EU's most indebted countries.
France is determined to reach a deal by the end of the year, but France and Germany still differ on how to sustain investment when the budget deficit is above EU limits and other countries. (Reporting by Stefano Rebaudo, editing by Barbara Lewis) ;))
