German yields steady as U.S. midterm shifts and eurozone CPI loom

 Eurozone government bond yields held steady near multi-week lows on Wednesday, as sovereign debt desks consolidated following a steep two-day rally, balancing early U.S. midterm election returns that showed Democrats making strong gains against anticipation of pivotal euro area inflation figures and commentary from European Central Bank Chief Economist Philip Lane. 

The benchmark German 10-year Bund yield was virtually flat on the day at 3.317%, holding just above Tuesday’s print of 3.29% - its lowest level in over two months.

At the front end of the curve, the policy-sensitive two-year German yield hovered close to its lowest level in over a month, trading at 3.028% as trading desks paused after absorbing a flight-to-safety bid triggered by tech-led equity turbulence and cross-asset volatility.

Trading across sovereign debt bourses was heavily colored by early counts from Tuesday’s U.S. congressional elections.

Initial returns and exit polling showed Democrats making decisive gains in their bid to wrest control of the House of Representatives from President Donald Trump’s Republicans, while the Senate contest remained closely fought.

Eurozone CPI and Lane Address in focus

Domestic attention is centered squarely on the euro zone’s flash harmonized consumer price index (HICP) due later on Wednesday, which fixed-income desks view as the defining fundamental test for the European Central Bank’s December policy gathering.

Consensus expectations point to headline inflation remaining uncomfortably sticky, pressured by elevated wholesale gas tariffs and lingering service-sector pricing power. A firmer-than-projected reading would sharply raise the odds of a 25-basis-point interest-rate increase at the ECB’s December meeting, challenging the recent bond rally.

Conversely, a softer print would validate the ECB’s decision to keep the benchmark deposit facility rate on hold at 2.50% last week.

Desks will also scrutinize an appearance by ECB Chief Economist Philip Lane later in the session. Fixed-income investors are hunting for Lane’s assessment of the persistence of domestic cost pressures following unexpected third-quarter economic contraction in France and a surprise 2% slump in German September retail sales.

Elsewhere, French 10-year OAT yields hovered near 4.97%, while British 10 year yield bounced off its lowest levels in over one month. 

The Bank of England’s Monetary Policy Committee convenes on Thursday. With money markets heavily pricing a 25-basis-point increase in Bank Rate to 4%.