Euro Zone Bond Yields Tumble Amid France's Political Shift

Euro zone government bond yields decreased on Tuesday as investors awaited U.S. economic data and monitored political developments in France closely. The risk premium for French bonds decreased amid hopes that France's National Rally would backtrack on fiscally expensive pledges if they win the elections.

Euro zone government bond yields edged lower on Tuesday, with investors awaiting U.S. economic data later in the session while closely watching political developments in France.

The risk premium investors demand to hold French government bonds dropped from its recent highs amid hopes France's National Rally will backtrack on fiscally expensive pledges should it win coming elections. Germany's 10-year bond yield, the benchmark for the euro area, fell one basis point (bp) to 2.40%, after falling 26 bps last week.

The gap between French and German 10-year government bond yields - a gauge of risk premium on French government bonds – narrowed 1.5 bps to 72.7 bps after hitting 82.34 bps on Friday, its highest level since February 2017. Italy's 10-year yield was down 3.5 bps at 3.91%, while the Italian-German yield gap narrowed slightly to 150 bps.

Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was 0.5 bps higher at 2.82%. Money markets price in a cumulative 65 bps of European Central Bank rate cuts by year-end, implying a further 25 bps move and a 60% chance of a third cut in 2024. They also discount 47 bpd from the Fed this year.

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