(Updates at 0944 GMT)
By Samuel Indyk
LONDON, June 5 (Reuters) - Germany's 10-year government
bond yield was steady on Wednesday after its sharpest two-day
drop since March following weak U.S. and European data, with
focus set to shift to the European Central Bank's policy
announcement on Thursday.
The ECB is widely expected to lower its deposit rate from a
record high of 4%, but there remains uncertainty about the
future path for rates.
Money market traders are pricing around 63 basis points
(bps) of cuts this year, implying two quarter-point moves and
around a 50% chance of a third cut.
"We're all sitting and waiting for tomorrow. We think the
ECB will do the 25 (basis point cut) and then say we have to
wait and see how data evolves," said Jens Peter Sørensen,
director, fixed income research at Danske Bank.
"If they do that then I think the market reaction should be
fairly benign."
Some policymakers have tried to take a move at the following
meeting in July off the table, while others, including French
rate-setter Francois Villeroy de Galhau, appeared more open to a
second straight move.
Much will depend on how inflation and wage data unfold over
the coming months.
On Wednesday, data showed euro zone producer prices fell 1%
in April.
Germany's 10-year bond yield, the benchmark for
the euro zone bloc, was up less than 1 bp at 2.549%. It fell 11
bps in the prior two days, its biggest two-day fall since March.
Bond yields move inversely with prices.
Germany's two-year bond yield, which is more
sensitive to European Central Bank rate expectations, was also
up 1 bp at 3.008%.
Yields across the globe have broadly fallen this week on the
back of soft labour market data from the U.S. and disappointing
manufacturing figures from both the U.S. and euro area.
Data on Tuesday showed a larger-than-expected drop in U.S.
job openings in April, pushing the number of available jobs per
job-seeker to its lowest in nearly three years.
"JOLTS data adds to a multitude of indicators that suggest
that some slowdown maybe coming in the US labour market," said
Mohit Kumar, chief economist Europe at Jefferies.
The benchmark U.S. Treasury yield was up 1.5 bps at 4.35% on
Wednesday, but still down over 20 bps in the last four trading
days.
The spread between U.S. 10-year Treasuries and German bunds
was at 180 bps, close to its tightest level since
March.
Italy's 10-year yield was higher by 1 bp at
3.88%, meaning the yield gap between Italian and German bonds
, a measure of risk premium investors seek to hold
Italian paper, stood at 132 bps.
(Reporting by Samuel Indyk; Editing by Andrew Heavens and
Sriraj Kalluvila)