Euro Zone Bonds Slip Amid Rate Cut Speculations

Euro zone government bond yields decreased as money markets anticipate a significant rate cut by the Federal Reserve. The Bank of England and the Bank of Japan are also holding meetings this week and are expected to maintain current rates. The U.S. Fed aims to ease financial conditions without causing market panic.

Euro zone government bond yields dipped on Monday as money markets increased bets on a substantial rate cut by the Federal Reserve, scheduled for Wednesday. The Bank of England and the Bank of Japan will also convene policy meetings later this week, where they are expected to keep existing rates intact.

Money markets have fully priced in a 25 basis points (bps) rate cut from the U.S. central bank and see a nearly 60% chance of a more substantial 50 bps move, a rise from about 50% last week, according to data from the CME FedWatch tool. Paul Donovan, chief economist at UBS Global Wealth Management, commented, "A rate cut of more than 25 bps seems unlikely -- while the Fed is late in cutting rates, a larger move might be perceived as a sign of panic."

Germany's 10-year yield, a benchmark in the euro zone, rose by 2.7 bps to 2.12%. Citigroup cited Fed Governor Christopher Waller, who remains open-minded about the size and pace of the rate cuts, noting that smaller, frequent cuts would be more prudent, especially given the upcoming elections. Investors are keenly awaiting remarks from Fed Chair Jerome Powell, especially in the press conference, where dovish rhetoric is expected.

Meanwhile, markets have priced in approximately 40 bps of European Central Bank rate cuts by the end of the year. The ECB, however, is expected to wait until December before making any further cuts to avoid hasty decisions. Comments from ECB Governing Council member Peter Kazimir emphasize the need for caution. Germany's and Italy's bond yields reflected these expectations, showing only marginal decreases.

Political developments in Italy and France are under close scrutiny, given the EU's Excessive Deficit Procedure. Italy aims to reduce its deficit-to-GDP ratio below the EU's 3% ceiling by 2026. In France, newly appointed Prime Minister Michel Barnier faces significant pressure to address the country's deteriorating public finances.

(With inputs from agencies.)