ECB's Rate Cut Strategy: Impact on Euro Zone Bond Yields

The European Central Bank's 25 basis points rate cut, anticipated by investors, has led to mixed bond yields in the euro zone. While long-term yields rose slightly, short-term yields fell. With rising U.S. tariffs and inflation pressures, further cuts are expected in December.

The European Central Bank's latest decision to trim interest rates by 25 basis points left euro zone government bond yields displaying mixed responses on Thursday. This action, the third of its kind this year, aligns with the ECB's view that inflation is coming under control but economic prospects remain bleak.

Germany's benchmark 10-year bond yield rose to 2.21%, countering a previous drop, while the two-year yield experienced a slight dip. Money markets anticipate continued cuts, pricing in a sub-2% deposit facility rate by mid-2025, as economic indicators and potential U.S. tariffs come into play.

Elsewhere, investors responded to lower inflation and economic data by reshaping rate cut predictions. Italy saw a slight drop in its yield, further reducing its gap with Germany's yield, as euro zone inflation was revised down. Meanwhile, political tensions in France put fiscal policy under scrutiny amid ongoing budget discussions.

(With inputs from agencies.)