Euro zone bond yields steady, ECB minutes show no rush to cut rates

By Ozan Ergenay and Amanda Cooper

LONDON, Nov 27 (Reuters) - Euro zone bond yields held steady on Thursday, but appeared headed for a second straight weekly decline, while minutes from the European Central Bank's most recent meeting suggested policymakers were in no rush to cut rates.

Germany's 10-year Bund yield DE10YT=RR, the euro zone's benchmark, was almost unchanged on the day at 2.678%, while French 10-year yields FR10YT=RR rose 1 basis point to 3.411% and Italian yields IT10YT=RR were steady at 3.4%.

The ECB left interest rates unchanged at their meeting at the end of October, arguing that policy was in a "good place" as the economy was showing resilience and inflation was firmly at target, according to minutes published on Thursday.

This has helped solidify confidence among investors that no further rate cut was coming this year and markets now see just a one-in-three chance of more easing in 2026.

TOO EARLY TO DISCUSS ECB CUT

ECB policymaker Martins Kazaks on Thursday said it was too early for the central bank to discuss another interest rate cut, as inflation in the euro zone might still turn out higher than expected.

"Given the data we have received up to now, I don’t think the time is ripe for discussing a rate cut," the Latvian governor said in an interview.

Euro zone bond yields have diverged sharply from those in the United States this month, as investors are pricing in a series of Fed rate cuts over the coming year, in contrast with the ECB.

EURO ZONE INFLATION STICKY

Peter Vanden Houte, chief economist at ING, said in a note to clients that euro zone inflation data still shows some stickiness, and selling price expectations climbed above the long-term average in every sector with consumers anticipating faster price increases ahead.

"What looks certain is that the region's economy remains on a growth track, albeit a subdued one. A meaningful uptick may not occur until Germany's budgetary stimulus kicks in, expected no sooner than the second half of 2026," he said.

"Given these trends, the ECB will likely keep interest rates unchanged, there's no need for more stimulus and inflation does not warrant any drastic new monetary policies."

Bund yields have risen by around 5 bps this month, while 10-year U.S. Treasury yields US10YT=RR have fallen 10 bps, bringing the two closer together than at any time in nearly two years DE10US10=RR.

CALMER UK MARKETS

UK bond markets were also calmer, after the British finance minister presented a budget on Wednesday that alleviated some concern about the government's long-term finances.

Antonio Ruggiero, FX & macro strategist at Convera, said markets took the UK budget in their stride. But the calm won't last, he added, with the heavy use of back-loaded tax measures raising doubts about how reliable Chancellor Rachel Reeves' 26-billion pound ($34.4-billion) revenue plan really is.

UK 30-year gilt yields GB30YT=RR, which are more sensitive to long-term fiscal issues, were up 1.9 bps at 5.23%, retracing some of Wednesday's near-12 bp drop, the biggest since April, partly as a result of an expected decline in supply in the coming year.

($1 = 0.7557 pounds)