Euro Zone Bonds Dip Amid Rate Cut Speculation

Euro zone government bond yields slipped as investors awaited the Ifo German business survey. Recent weak economic data and dovish signals from central banks led investors to bet on future rate cuts. French debt risk premium remained high amid fears of increased public spending, sparking budgetary crisis concerns.

Euro zone government bond yields slipped on Monday as investors awaited the Ifo German business survey, after weak economic data and dovish signals from the Swiss and the British central banks last week led investors to increase bets on rate cuts. The French debt risk premium remained within striking distance of its seven-year high as investors fear that a far-right victory could lead the government to increase public spending, triggering risks of a budgetary crisis.

Money markets priced in around 70 basis points (bps) of European Central Bank rate cuts in 2024, implying a further move and a 60% chance of a third cut in 2024. The German 10-year bond yield, the benchmark for the euro area, was down 0.5 bp at 2.39%.

The gap between French and German 10-year yields - a gauge of the risk premium investors demand to hold French government bonds – was at 73 bps. It recently hit 82.34 bps, its highest level since February 2017. Italy's 10-year yield fell 2.5 bps to 3.90%, while the Italian-German yield gap was at 152 bps.

Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was 0.5 bps higher at 2.79%.

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