Market Reactions: Euro Zone Bond Yields Drop Amid U.S. Inflation Data

Euro zone bond yields fell as U.S. data showed cooled inflation, impacting Federal Reserve's rate expectations. Treasury yields also dropped, affecting European benchmark rates. Market anticipates slower rate cuts in 2025, with further inflation progress required. French politics spotlight fiscal challenges, impacting bond yield spreads.

The euro zone saw a decline in government bond yields on Friday, mirroring a similar retreat in Treasury yields after data from the United States indicated a cooling in consumer inflation for November. The softened inflation data has implications for Federal Reserve rate policies, raising doubts about maintaining higher rates.

The personal consumption expenditures index in the U.S. posted a 2.8% rise annually for November, matching the previous month and defying forecast expectations of 2.9%. Although U.S. figures have limited direct impact on euro zone policy, the German Bunds' yield experienced a fall, influenced by a significant drop in U.S. Treasury yields.

Amidst these developments, investors are preparing for prolonged U.S. interest rates into 2025. The Federal Reserve stressed further rate reductions depend on inflation trends, with a low probability of rate hikes. Meanwhile, European Central Bank's rate cut expectations bring more volatility to fixed income markets.

(With inputs from agencies.)