Investor Bets Soar on ECB Rate Cut as German Yields Drop

Germany's two-year bond yields dropped, fueling investor bets on a December ECB rate cut. Policymakers are debating stimulus measures amid inflation target concerns. The market anticipates a lower ECB deposit rate by June 2025, with key yield gaps influencing investor actions.

Germany's bond yields saw a decline on Wednesday, spurring increased speculation in money markets about a possible 50 basis point rate cut by the European Central Bank (ECB) in December. The anticipation stems from investor expectations that the ECB might speed up its monetary easing cycle.

French central bank chief Francois Villeroy de Galhau expressed concerns on Tuesday about the ECB potentially undershooting its inflation target and acting too tardily in undoing previous rate hikes. This has prompted discussions among ECB policymakers on lowering interest rates to stimulate the economy, according to several sources.

Current market forecasts suggest the ECB deposit facility rate could be around 2% by June 2025, down from the current 3.5%. Investors have fully factored in a 25 basis point rate cut in December, with a nearly 40% probability for a 50 basis point move—both levels seeing increases from the previous day. Germany's two-year bond yield, closely tied to ECB rate expectations, fell by 6 basis points to 2.14%. The benchmark 10-year bond yield for the euro zone also saw a slight dip.

(With inputs from agencies.)