Euro Zone Bond Yields Tumble Amid Falling German Inflation

Euro zone bond yields fell after German inflation data showed a decline in six key states, leading traders to bet on further rate cuts by the European Central Bank (ECB). German and Italian bond yields dropped, while market expectations for ECB rate cuts increased, despite concerns from some analysts.

Euro zone bond yields decreased on Thursday, following data indicating a decline in German inflation across six key states. Traders responded by increasing bets on rate cuts by the European Central Bank (ECB).

Germany's 10-year bond yield fell by around 2 basis points to 2.23%, while the more rate-sensitive two-year yield also decreased by 4 basis points to 2.23%. The data revealed a drop in inflation in six German states, including North Rhine-Westphalia, where it declined from 2.3% in July to 1.7% in August.

Reinforcing expectations of a broader decline across the euro zone, Spanish inflation also fell to 2.4% year-on-year in August from 2.9% in July. Market speculation now prices in around 62 basis points of ECB rate cuts by the end of the year, indicating potential cuts in September, October, and December. However, some analysts believe the market's reaction is excessive, noting that core inflation remains elevated in Germany.

Italian bond yields also reacted, with Italy's 10-year yield decreasing by 3 basis points to 3.61%, and the yield gap between Italian and German bonds narrowing to 137 basis points. Additionally, Italy's funding costs decreased during a bond auction, where it raised €9.25 billion over three bonds.

(With inputs from agencies.)