Euro zone yields little changed after US shutdown, eye Treasuries for direction

By Stefano Rebaudo

Oct 1 (Reuters) - Euro zone government bond yields were little changed, with investors closely watching moves in U.S. Treasuries amid a U.S. government shutdown.

The shutdown commenced hours after the Senate rejected a short-term spending measure that would have kept government operations afloat through November 21.

Tuesday’s economic figures from the single currency bloc failed to trigger price action in the sovereign bond markets.

Germany’s 10-year Bund yields, the bloc’s benchmark, were roughly unchanged at 2.02%.

Data showed on Wednesday that euro zone inflation accelerated last month, likely reinforcing bets on the European Central Bank keeping interest rates on hold for some time.

"The figures are still compatible with the ECB Staff Projections foreseeing a further slowdown in core inflation to 2.2% and headline to 2.0% in the fourth quarter," said Giada Giani, economist at Citi.

"We still expect inflation to slow more meaningfully in 2026, as wage growth has further to soften now that the real wage catching-up process is completed, and that should bring along the final leg lower in services inflation," she added.

US SHUTDOWN DURATION IS KEY

Analysts said the impact of the U.S. shutdown would depend on its duration, noting that the economic effects have historically been temporary.

This time, however, the situation is aggravated by the possibility of it lasting longer than usual and by threats of more permanent layoffs within the government workforce.

"The prospect of flying blind when the government shutdown delays key data releases, especially around the jobs market this week and next week around prices, can instil some caution into the market," said Mohit Kumar, economist at Jefferies.

U.S. Treasury yields were slightly up in London trade, with the benchmark 10-year rising 0.5 basis points (bps) at 4.15%.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for European Central Bank policy rates, were flat at 2.02%.

Market expectations about the ECB rate outlook remained unchanged.

Traders priced in an about 30% chance of a 25 bps ECB rate cut by July EURESTECBM7X8=ICAP. The key rate is seen at 1.98% in February 2027 from the current 2%. EURESTECBM11X12=ICAP

The current level of interest rates in the euro zone is "adequate" and any future monetary policy decisions will be made taking into account global geopolitical uncertainties, ECB Vice-President Luis de Guindos said on Tuesday.

The yield gap between safe-haven Bunds and 10-year French government bonds DE10FR10=RR — a market gauge of the risk premium investors demand to hold French debt — was 82 bps, close to its seven-month high, after new French Prime Minister Sebastien Lecornu said last week he aimed for a budget deficit of around 4.7% of GDP in 2026.