Euro Zone Bond Yields Dip Amid Anticipation of Economic Stimulus

Euro zone bond yields fell as investors responded to China's potential economic support and a predicted interest rate cut by the ECB. Weak European business activity and U.S. consumer confidence data bolstered these expectations. German and Italian yields saw significant declines, with market eyes on upcoming inflation data.

Euro zone bond yields edged lower on Thursday following news that China may introduce further economic support, fueling optimism about a broad-based easing in financial conditions.

Investors have now assigned a roughly 60% probability to an interest rate cut next month by the European Central Bank (ECB). This shift comes after weak European business activity surveys, a downbeat German business morale report, and declining U.S. consumer confidence fueled rate cut bets in the previous session. "Risk sentiment is strengthening this morning due to rumours of an additional $142 billion injection from Chinese authorities into the banking system," Danske Bank analysts noted.

Germany's 10-year bond yield, a benchmark for the euro zone, fell 1.6 basis points to 2.17%, while Italy's 10-year yield declined 3.9 bps to 3.5%. The spread between Italian and German yields was 132.4 bps. Germany's two-year bond yield, sensitive to ECB rate expectations, decreased by 2 bps to 2.114%. UniCredit analysts remarked that ECB officials' speeches could impact today's trading, especially in light of the mounting rate-cut expectations. Upcoming inflation data from France and Spain could further clarify the ECB's next move.

The ECB has already reduced rates by 25 basis points twice this year. French yields, which rose above Spain's on Tuesday, are being closely monitored due to concerns about the new government's budget deficit handling abilities. The gap between French and German 10-year yields was last observed at 78.3 bps, having reached its widest since 2012 during France's parliamentary elections.

(With inputs from agencies.)