Eurozone Bond Yields Plummet as ECB Rate Cut Bets Surge

German short-dated bond yields and the euro fell sharply as euro area business activity declined. Markets anticipate ECB rate cuts with a 50% chance of a 50 bps cut in December. Investors shifted to safer bonds, influenced by geopolitical tensions and data showing a contracting services sector.

In a striking market shift on Friday, German short-dated government bond yields and the euro plunged to their lowest levels in nearly two years. This came as new data revealed a significant decline in euro area business activity, leading to increased speculation of potential rate cuts by the European Central Bank (ECB).

The latest PMI survey indicated a sharp downturn in euro zone business performance, as the region's dominant services sector contracted and manufacturing slipped further into recession. Business activity in France decelerated at its fastest pace since earlier this year, while Germany saw a fifth consecutive monthly decline, hitting its worst performance since February.

Investor reactions were swift, pushing euro zone bond yields lower on expectations for additional ECB rate cuts. The euro fell by as much as 1%, and money markets adjusted to price a 50% chance of a 50 basis point reduction at the ECB's December meeting. Meanwhile, geopolitical tensions are contributing to the demand for safe-haven bonds, with influences such as Russia's missile launch and escalating US-North Korea tensions adding further concerns.

(With inputs from agencies.)