German Two-Year Yield Hits Six-Month Low Amid Global Rate Cut Expectations

The German two-year yield has dropped to its lowest in six months, suggesting greater confidence in global rate cuts this year. The yield curve inversion, a potential signal of economic downturns, has also been observed in the U.S. Markets anticipate rate cuts from both the U.S. Federal Reserve and European Central Bank.

German two-year yields fell to their lowest point in six months on Thursday, reflecting growing investor confidence in substantial global rate cuts this year. The yield dropped three basis points to 2.682%, the lowest since February.

Over the last three trading sessions, it has declined nearly 15 basis points. In contrast, the euro zone benchmark 10-year bund yield remained steady at 2.44%, widening the spread between the two to -24 basis points, marking its least inverted state since January.

Typically, yields on longer-dated debt are higher, but Germany's 2-year yield has exceeded its 10-year yield since November 2022. This yield curve inversion, also observed in the United States, is a critical market signal that has historically preceded economic downturns, albeit with varied timing.

Recent data has fueled market confidence that the U.S. Federal Reserve will initiate its rate-cutting cycle at its September meeting. Additionally, markets are nearly pricing in two more rate cuts this year by the European Central Bank, following a rate cut in June, bolstered by soft euro zone business activity data from Wednesday.

This has contributed to reductions in shorter-dated yields. For instance, Italy's 10-year yield dropped 1 basis point to 3.79%, and its 2-year yield decreased by 2 basis points to 3.11%.

The spread between German and French 10-year yields is also under scrutiny amid uncertainties in French politics, last observed slightly wider at 70.5 basis points.

(With inputs from agencies.)