Euro Zone Bond Yields Continue Descent as ECB Decision Looms

Euro zone government bond yields dropped for the second consecutive day, influenced by an anticipated policy announcement from the European Central Bank (ECB). Investors are looking at a slowdown in Germany's economy, with the ECB expected to maintain interest rates. U.S. bond markets responded to retail sales data and political events involving presidential candidate Donald Trump.

Euro zone government bond yields fell for a second day on Tuesday, as investors awaited the European Central Bank's policy announcement on Thursday. Data suggested a further slowdown in Germany, Europe's largest economy. Germany's 10-year bond yield, the euro area's benchmark, dropped 3.5 basis points (bps) to 2.437%, following a 2.5 bps fall on Monday.

This month, yields have been declining as both Europe and the U.S. reported easing inflation readings. Expectations are rising that major central banks might lower borrowing costs soon. On Thursday, the ECB is set to announce its latest policy decision, likely holding interest rates steady. Future rate cuts will depend on economic performance.

'I think they will say they are data-dependent,' Nordea's Chief Analyst Anders Svendsen commented, adding, 'They can cut in September, but only if the data supports it.' According to LSEG data, the futures market sees less than a 10% chance of a move on Thursday, but about an 85% chance of a quarter-percentage-point cut in September.

Germany's two-year yield fell 2.5 bps to 2.768%, its lowest level since June 21. Political uncertainty also played a role; markets considered the potential implications of an assassination attempt on U.S. presidential candidate Donald Trump. Yields on the U.S. 10-year bond decreased by 3 basis points to 4.2% on Tuesday, impacted by robust retail sales data.

'There doesn't seem to be a long-lasting impact from the assassination attempt,' said Sophia Oertmann, an analyst at DZ Bank. 'Markets had already raised their chances of a Trump victory after the TV debate,' she added, referencing the June 27 debate between Trump and President Joe Biden.

French political dynamics are also influencing markets, with President Emmanuel Macron expected to accept the resignation of his government, allowing lawmakers to convene in parliament on Thursday. France's 10-year yield decreased by 2 bps to 3.091%. The yield gap between French and German 10-year bonds stood at 65 bps, down from a peak of 85 bps in late June.

(With inputs from agencies.)