Euro Zone Bond Yields Rise Amid ECB Rate Cut Impact

Euro zone government bond yields rose on Friday, ending the week with their largest fall since mid-March. The European Central Bank's rate cut and weak U.S. economic data influenced this trend. Germany's 10-year bond yield, a euro area benchmark, and Italy's 10-year bond yield also saw minor increases.

Euro zone government bond yields edged up on Friday and were on track to end the week with their biggest weekly fall since mid-March after the European Central Bank's rate cut and weak U.S. economic data. The ECB's remarks led investors to slightly reduce their bets on future monetary easing, which had increased in the days before its policy decision on the back of U.S. data.

Germany's 10-year yield, the benchmark for the euro area, was up 1 basis point (bp) at 2.55%, and on track for a weekly fall of 9.5 bps. It hit a 6-1/2 month high at 2.707% last Friday. Money markets priced in around 60 bps of ECB monetary easing in 2024, implying two rate cuts including the one decided on Thursday and about a 40% chance of a third move by year-end.

Germany's 2-year government bond yield, more sensitive to policy rate expectations, was up 1.5 bps at 3.03%. It hit 3.125% on Friday, its highest since mid-November. Italy's 10-year yield rose 1 bp to 3.87%.

The yield gap between Italian and German bonds , a gauge of the risk premium investors seek to hold bonds of the euro area's most indebted countries, was at 131 bps. It hit a 15-month low of 115.4 bps in mid-March. The spread between U.S. and German 10-year yields - a gauge of expectations for monetary policy divergence between the Federal Reserve and the ECB – was at 177.9 bps from about 195 bps late last week.

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