Euro Zone Yields Drop as Inflation Falls Below ECB Target

Bond yields in the euro zone fell after data showed inflation dropping below the European Central Bank's 2% target. This bolstered expectations of an October rate cut. Germany's bond yields hit their lowest levels since January, while the gap between French and German yields narrowed.

Euro zone bond yields plummeted on Tuesday following data that revealed inflation in the bloc dipped below the European Central Bank's 2% target in September. This development, coupled with comments from ECB officials, strengthened the likelihood of an interest rate cut in October.

The inflation rate in the euro zone fell to 1.8% year-on-year in September from 2.2% in August, marking the first drop below 2% since mid-2021. Consequently, Germany's 10-year bond yield, which serves as a benchmark for the euro zone, dropped 8 basis points to 2.052%, its lowest level since January.

Market analysts like Jussi Hiljanen from SEB noted the significant shift in interest rate expectations, with traders now assigning an 85% probability to a 25 basis point cut by the ECB in October. Policymakers like Olli Rehn emphasized the inflation slowdown as a strong case for easing monetary policy further.

(With inputs from agencies.)