Euro Zone Bonds React to Anticipated Rate Cuts Amid Global Central Bank Meetings

Euro zone government bond yields were varied on Monday as investors bet on a significant rate cut by the Federal Reserve. The Bank of England and Bank of Japan are expected to maintain their current rates. Economic experts anticipate cautious initial rate cuts, with more substantial cuts potentially later.

Euro zone government bond yields displayed mixed reactions on Monday amid heightened speculations of a substantial 50 basis point rate cut from the Federal Reserve scheduled for Wednesday.

Meanwhile, the Bank of England and the Bank of Japan are set to meet later this week, with expectations of maintaining current interest rates. According to the CME FedWatch tool, markets are anticipating a 25 basis point cut, with a 59% chance of a 50 basis point cut, up from 50% last week.

Paul Donovan, chief economist at UBS Global Wealth Management, remarked, "A rate cut of more than 25 basis points seems unlikely; a larger move could signal panic." He suggested that more frequent, smaller cuts are probable. Germany's 10-year yield, which serves as the euro zone benchmark, rose by one basis point to 2.16%. Fed Governor Christopher Waller indicated openness to varying cut sizes, based on recent U.S. employment data.

Jabaz Mathai from Citi noted that the Fed appears to favor starting with smaller cuts, leaving room for larger future adjustments, influenced partly by election timing. Analysts will pay close attention to Fed Chair Jerome Powell's statements. Additionally, European markets have priced in 37 basis points of ECB rate cuts by the year's end.

Italy's 10-year yield dipped 0.5 basis points to 3.51%, with the Italian-German bond spread at 135 basis points, reflecting investor risk assessments. Political developments in Italy and France are under scrutiny as both face EU's Excessive Deficit Procedure. Italy aims to adhere to EU deficit limits, while France's new PM Michel Barnier grapples with fiscal challenges.

(With inputs from agencies.)