Euro Zone Bonds React Amidst Political Uncertainty and Trump's Impact

Euro zone government bond yields decreased as investors considered the implications of Donald Trump's second presidential term and the collapse of the German government. The fall in yields is amid fears of Trump's policies on Europe, potential ECB rate cuts, and Germany's political disarray.

Euro zone government bond yields declined on Monday as investors assessed the potential repercussions of Donald Trump's anticipated second term as U.S. President and the recent collapse of Germany's government. The 10-year German bond yield, recognized as the euro zone's benchmark, dropped 3 basis points, reaching a low of 2.34% after a stable close last week. Generally, yields move inversely to prices.

Germany's political turmoil deepened following Chancellor Olaf Scholz's declaration that he is open to calling a confidence vote before Christmas, signaling possible snap elections after his coalition's dissolution. Europe's leading economy faces turbulence due to the coalition collapse and governmental expenditure disputes.

The risk appetite in Germany, measured by the 10-year swap spread, stood at -4 bps, following a historic low since 2003. While Trump's victory pushed U.S. Treasury yields higher based on anticipated inflation and a potential Federal Reserve slowdown, Europe's outlook remains complex. Trump's possible tariffs on Europe could slow growth, potentially prompting the European Central Bank to lower rates, consequently reducing yields.

No current deterrents exist for the ECB to cut rates come December, according to official remarks on Sunday. Traders anticipate the ECB's quarter-point rate cut in December.

Spain mirrored the euro zone trend with a 3 bps drop to 3.074% in its 10-year yield, even after a credit rating upgrade from Fitch. With limited economic data on Monday and significant reports like Germany's ZEW survey and U.S. consumer price data ahead, European markets brace for more insights. French and U.S. bond markets observed holidays on Monday.

(With inputs from agencies.)