Euro Zone Bonds React to German Government Turmoil and Trump's Potential Policies

Euro zone government bond yields dropped as investors assessed Donald Trump's potential second presidential term and the collapse of the German government. German bond yields hit a one-week low, prompting speculation of ECB rate cuts if Trump's tariffs impact Europe. Traders expect a December ECB rate cut.

Euro zone government bond yields experienced a decline on Monday, as investors evaluated the effects of a potential second term for Donald Trump and the German government's collapse last week.

The German 10-year bond yield, setting the euro zone benchmark, fell by 3 basis points to reach a one-week low of 2.34%. This followed a week where yields ended unchanged. In response to the political turmoil, German Chancellor Olaf Scholz has hinted at a possible confidence vote in parliament by Christmas, potentially leading to snap elections after his coalition collapsed.

The shifts in Germany, Europe's largest economy, follow disputes over government spending, with the nation's 10-year swap spread marking its lowest since 2003 last week. Meanwhile, Trump's recent electoral success boosted U.S. Treasury yields, suggesting anticipation of inflation driven by his policies. Should Trump impose significant tariffs on Europe, this may affect growth, prompting the European Central Bank to intensify rate cuts.

Despite expectations of an ECB rate cut in December and Spain's bond yields dipping in alignment with euro zone peers amid a Fitch upgrade, the economic data calendar remains sparse early in the week, with key reports from Germany and the U.S. expected shortly.

(With inputs from agencies.)