Euro Zone Bond Yields Rise Amid Anticipated ECB Rate Cut
Euro zone bond yields increased on Thursday as markets anticipated a 25 basis points interest rate cut by the European Central Bank (ECB). This follows a period of declining yields. The ECB's decision is influenced by recent economic data and concerns over inflation, with further rate cuts being considered for later this year.
Euro zone bond yields rose on Thursday ahead of a widely anticipated interest rate cut from the European Central Bank, bouncing back after falling sharply in recent days. Germany's 10-year bond yield, the benchmark for the euro zone, was up 3 basis points at 2.114%, having touched 2.086% on Wednesday, its lowest since the market turmoil of early August. Yields move inversely to prices.
The two-year German yield was up 6 bps at 2.2%, after falling to its lowest since March 2023 on Wednesday at 2.125%. Shorter-dated yields are highly sensitive to expectations about central bank interest rates. Markets fully expect the ECB to cut rates by 25 bps to 3.5% at 1215 GMT. Traders are pricing in the possibility of two more rate cuts this year, although that could change depending on what ECB President Christine Lagarde communicates about the growth and inflation outlook at the post-decision press conference.
"A 25-bp cut is a consensus and should not be a surprise," said Mohit Kumar, chief economist for Europe at Jefferies. "We expect Lagarde to adopt a neutral tone, justifying the rate cut given recent weakness in the data." "Our view remains that the next cut after today is likely to be in December. The staff forecasts are likely to show that core inflation will still remain sticky, justifying a gradual approach from the ECB."
Bond yields have dropped over the last two weeks as economic data has made investors increasingly confident the all-important U.S. Federal Reserve will cut rates deeply this year, starting later this month. A sharp drop in oil prices has reassured markets that inflation is unlikely to rear back up and that central banks such as the ECB can ease monetary policy further. Oil prices jumped on Thursday, however, spurred by concern over Hurricane Francine's impact on U.S. output.
Italy's 10-year yield, which on Wednesday fell to its lowest since August 2022, was last up 1 bp at 3.546%, leaving the premium over German bonds at 141 bps. The Financial Times reported on Thursday that European Union officials are examining ways to extend as much as of 350 billion euros ($385.49 billion) of COVID-19 era bonds in order to prevent the bloc's common budget being overwhelmed by repayment costs.
(With inputs from agencies.)
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