Rising Eurozone Borrowing Costs Amid Economic Uncertainty

Eurozone borrowing costs increased as markets weighed higher U.S. yields against Europe's weak economic outlook, influencing ECB rate cut expectations. German investor confidence dropped following U.S. election and Berlin's government collapse. Yields on German and Italian bonds rose, while spread dynamics highlighted investor risk preferences. Germany's finance minister dismissed a budget freeze.

On Wednesday, eurozone borrowing costs surged as markets found themselves balancing between the ascent of U.S. yields and a lackluster European economic forecast, which continues to fuel projections for rate reductions by the European Central Bank.

The sentiment among German investors waned this month, influenced by the ripple effects of Donald Trump's U.S. election victory and the subsequent disintegration of Berlin's government, as evidenced by recent data. U.S. Treasury yields rocketed on Tuesday, driven by bond investors recalibrating in anticipation of President-elect Trump's policies, characterized by lower taxes and trade tariffs expected to stoke inflation.

Germany's 2-year yield, known for its sensitivity to policy rate expectations, climbed 2.5 basis points to 2.16%, following an 8 basis points dip in previous sessions. Similarly, Germany's benchmark 10-year yield for the euro area elevated by 3.5 basis points to 2.39%. Meanwhile, Italy's 10-year government bond yield, another key eurozone benchmark, increased by 4.5 basis points to 3.68%, reflecting a 128 basis points spread over German rates. Germany's asset swap spread, although recently hitting an all-time low, experienced upward movement, while the new German Finance Minister Joerg Kukies asserted there would be no budget freeze, despite the country's political turmoil.

(With inputs from agencies.)