Trump's Win Sends Euro Bond Yields Tumbling, Could Spark ECB Rate Cuts

The euro area's government bond yields fell as markets anticipated rate cuts following Trump's U.S. presidential victory, initially shaking Europe's economic outlook. ECB's potential interest reduction is eyed amid mounting tariffs, possible trade wars, and fears of an EU economy fragmentation.

Following Donald Trump's election victory, euro area short-dated government bond yields have seen a significant decline, driven by markets' anticipation of increased rate cuts by mid-2025. This development adds pressure on the European Central Bank to implement more aggressive monetary policy measures.

ECB Vice President Luis de Guindos warned on Wednesday that fresh tariffs introduced by a Trump administration could hamper global economic growth and escalate trade tensions, resulting in a vicious cycle. Money markets are intensifying bets on monetary easing, moving towards a deposit rate as low as 2% by June 2025, signifying a 25 basis point cut per meeting.

Germany's two-year bond yields, closely tied to policy rate discussions, plummeted significantly, while the benchmark Bund yield also showed declines. The inversion of the yield curve points to investor pessimism regarding the long-term economic forecast as potential policy divergence between the Federal Reserve and ECB emerges.

(With inputs from agencies.)