Euro Zone Bond Yields Stabilize as Inflation Gauge Dips Below Target

Euro zone bond yields showed little movement, maintaining near low levels as a key inflation measure fell below the ECB's 2% target. Germany's benchmark 10-year bond yield steadied at 2.199%. Trump's policies on tariffs and the U.S. Treasury impacted the market, with ECB easing anticipated.

In a steady financial landscape, euro zone government bond yields remained largely unchanged from the previous session's multi-week lows. This stability coincided with a significant benchmark inflation gauge slipping below the European Central Bank's (ECB) 2% target ahead of crucial price data expected later this week. Germany's 10-year bond yield, a key indicator for the euro zone, was last reported at 2.199%, closely aligning with Monday's near four-week low at 2.197%, following shifts in U.S. Treasuries linked to Scott Bessent's nomination as U.S. Treasury Secretary by President-elect Donald Trump.

Bond prices, which inversely correspond to yields, reflected cautiously optimistic sentiments; a recent survey by Germany's Ifo Economic Institute highlighted a slight improvement in the export industry's mood as it awaited further details on Trump's trade policies. Trump announced drastic tariffs on imports from Canada, Mexico, and China on Monday, raising concerns over potential high tariffs on European Union goods. Societe Generale's Kenneth Broux warned that even though Europe is not yet a direct target, the fear of tariffs poses a risk for euro zone growth and might expedite the ECB's rate adjustment process next year.

On a related note, traders are bracing for pivotal euro zone inflation data due Friday. Current market speculations anticipate a 25 bp interest rate cut in December, with a 35% probability assigned to a 50 bp reduction. This aligns with ECB's expectation of ongoing rate reductions as inflation subsides and economic slowdown risks remain, particularly considering upcoming ECB policy meetings. Meanwhile, Germany's short-term bond yields demonstrated sensitivity with a 2 bps increase to 2.028%, reflecting responses to recent economic indicators.

(With inputs from agencies.)