European Bond Yields Drop Amid Rate Cut Speculations

German Bund yields fell to multi-week lows as investors anticipated a September rate cut following remarks from the European Central Bank (ECB). Although ECB President Christine Lagarde said the decision remains open, market expectations for future rate cuts were reinforced by recent economic and inflation data.

On Thursday, German Bund yields reached multi-week lows driven by expectations for a September rate cut, fueled by recent European Central Bank (ECB) comments. Despite offering no definitive guidance on rate movements, ECB President Christine Lagarde's indication that September's decision remains 'wide open' bolstered market sentiment.

The 10-year Bund yield, a benchmark for the eurozone, dipped by 1.5 basis points to 2.403%, hitting a three-week low at 2.401%. Samuel Adams, European economist at UBS Global Wealth Management, pointed out that evidence of ongoing disinflation allows the ECB some leeway before reducing policy rates further.

Money markets are pricing in a 75% chance of a second 25-basis point rate cut in September and a cumulative 70 basis points of cuts in 2024, matching levels observed before the latest ECB statement. Allianz Global Investors' Massimiliano Maxia also supported the high likelihood of a September rate cut, emphasizing the importance of upcoming wage data in late August.

Adding to the discourse, Nicolas Forest, chief investment officer at Candriam, believes the market anticipates two additional cuts before year-end, supported by favorable inflation dynamics. Germany's two-year government bond yield, sensitive to ECB rate movements, dropped by 3.5 basis points to 2.74%.

Italy's 10-year yield fell by 2.5 basis points to 3.70%, near a three-month low, while the spread between German and Italian Bunds stabilized at 128 basis points. The gap between French and German yields also remained stable at around 65 basis points.

(With inputs from agencies.)