Euro Zone Bonds and Upcoming U.S. Data: A Comprehensive Outlook

Euro zone government bonds showed mixed trends ahead of crucial U.S. manufacturing data and job figures, which are expected to influence the Federal Reserve's easing cycle. German bond yields rose to a month-high following regional elections, while Italian yields showed increment. The U.S. rate cut decision is keenly awaited.

Euro zone government bonds faced uncertainty on Tuesday, awaiting U.S. manufacturing data which could influence expectations for the Federal Reserve's easing cycle. Analysts are also focused on U.S. job numbers due later in the week, which should clarify the potential rate cut magnitude in September. Markets currently expect a 25 basis points cut, with around a 30% chance of a 50 basis points cut.

Bund yield, serving as the euro area's benchmark, climbed to a one-month high on Monday. Spreads tightened after German regional state elections adversely affected the ruling coalition. It last dipped 0.5 basis points (bps) to 2.33%.

Alternative for Germany made history by becoming the first far-right party to clinch a regional election win since World War Two. The German two-year yield, sensitive to anticipated policy changes, went up by 0.5 bps to 2.42%.

Italy's 10-year yield increased by 0.5 bps to 3.71%, while the gap between Italian and German 10-year yields stood at 137 bps.

(With inputs from agencies.)