Euro Zone Bond Yields Rise as Fed Signals Rate Cuts

Euro zone bond yields have increased slightly after three weeks of declines, signaling a calmer atmosphere in the markets as the holiday season approaches. Germany’s benchmark 10-year bond yield rose by 2 basis points to 2.034%. On Friday, it hit a nine-month low at 2.012% after the US Federal Reserve hinted at potential rate cuts. The European Central Bank (ECB) held rates at a record 4% last week and emphasized that borrowing costs would remain high until inflation was under control. Despite this, investors’ expectations for significant rate cuts in 2024 have remained largely unchanged, with over 150 basis points of cuts already priced into derivatives markets. Italy’s 10-year yield also experienced a minor increase, reaching 3.747% after hitting an 11-month low of 3.7% last week. The closely monitored gap between Italian and German 10-year borrowing costs currently stands at 170 basis points. According to some experts, the expectation that the ECB will cut rates further appears to be overstated. UniCredit strategists noted that current market expectations for rate cuts by the Fed and the ECB may be overstretched, implying that longer-term yields are also stretched. Overall, as the week before Christmas begins, market activity is expected to progressively ease.