Eurozone sovereign bond yields were sharply lower on Thursday (Dec 14) after ticking higher as the European Central Bank left rates unchanged and cut inflation forecasts.

Borrowing costs tumbled to multi-month lows earlier in the session, taking their cue from US Treasuries after the Federal Reserve signalled it was done with interest rate rises, shifting the focus to when borrowing costs might drop.

The ECB signalled an early end to its last remaining bond purchase scheme, wrapping up a decade-long experiment in hoovering up debt across the 20-nation euro zone.

Germany’s 10-year bond yield, the benchmark for the euro area, fell to 2.029 per cent, its lowest since March, and was last down 4.5 basis points (bps) at 2.124 per cent.

Money markets priced in 153 bps of rate cuts in 2024 from up to 160 bps earlier in the session.

Analysts said the ECB moderately pushing back against market expectations for rate cuts and the decision on the Pandemic Emergency Purchase Programme (PEPP) supported peripheral sovereign bonds.

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Italian 10-year yields fell by 16 bps, Spanish and Portuguese by 12 bps.

Bond prices move inversely to yields.

The spread between Italian and German 10-year yields – a market gauge of premium investors asking to hold bonds of most indebted countries over the safe-haven Bund – tightened by 10 bps to 165 bps after the ECB statement.

“Italian spread is narrowing convincingly after the ECB said it will reduce PEPP reinvestments, in a move which falls short of an outright early end to the reinvestment flows,” said Richard McGuire, head of rates strategy at Rabobank.

The ECB said full reinvestment under the PEPP will end on June 30 – before the previous deadline of December 2024 – and the portfolio will fall by US$8.22 billion per month until the end of the year.

The central bank can use PEPP reinvestments to buy bonds of highly indebted countries without abiding by the so-called “capital keys,” which force the ECB to split purchases according to each country’s gross domestic product and population.

The German two-year bond yield, which is sensitive to ECB interest rate expectations, fell to a nine-month low of 2.458 per cent and was last 12.5 bps lower at 2.53 per cent.

The Fed left interest rates in the 5.25 per cent to 5.5 per cent range on Wednesday and Chair Jerome Powell said rate hikes are likely to be over.

Investors had already been expecting steep Fed rate cuts in 2024 but added to those bets, pricing in 150 bps of easing by next December.

“The surprise from the (Fed) was more the lack of push-back from Chair Powell on the 2024 rate cut narrative,” said Benjamin Schroeder, rates strategist at ING.

“He almost endorsed it, which leads us to question whether he knows something of significance that we don’t.” Schroeder said the Fed may be worried about “breaking” something in the economy, such as the property market. REUTERS