Eurozone bond yields trade mixed near multi-month lows
EUROZONE bonds were trading mixed with yields holding near multi-month lows in thin trading conditions on Thursday (Dec 28) as markets bet that central banks will soon embark on a rate-cutting cycle as inflation returns towards target.
Germany’s 10-year yield, the benchmark for the eurozone, was last up 2.5 basis points (bps) at 1.922 per cent, edging up from Wednesday’s lowest level in more than 12 months at 1.898 per cent. Bond yields move inversely to prices.
Yields at the shorter end of the curve, which is more sensitive to changes in interest rate expectations, were lower and also near multi-month lows.
Germany’s two-year yield was down 2 bps at 2.384 per cent, its lowest level since March 24 when global banking turmoil had markets betting that central banks would refrain from raising rates further.
“The main driving force behind the moves is expectations for rate cuts from the major central banks,” said Amanda Sundström, fixed income and FX strategist at Seb.
“Things have been moving quite quickly and I think it will continue until we get new data at the beginning of the year.”
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Money markets have been quick to add to expectations for rate cuts as inflation has fallen more quickly than forecast.
Traders are now pricing around a 70 per cent chance that the European Central Bank will begin cutting interest rates at the March meeting, while around 165 basis points of easing is priced for next year.
ECB policymakers have attempted to push back on those expectations but with limited success as headline consumer price inflation in the eurozone came in lower than expectations for the third straight month in November, challenging the narrative that interest rates would remain high through 2024.
On Thursday, ECB policy maker Robert Holzmann said it was too early to talk about lowering borrowing costs and such a move in 2024 is anything but certain, Bloomberg News reported.
Italy’s 10-year yield, the benchmark for the eurozone’s more indebted countries, rose 4 basis points to 3.532 per cent, just above Wednesday’s trough of 3.468 per cent, the lowest since August 2022.
That pushed the spread between Italy and Germany’s 10-year yields wider to around 160 bps, although it was still close to its tightest level since June of 154 bps.
Meanwhile, Britain’s 10-year gilt yield briefly touched its lowest level since April 6 at 3.433 per cent. It was last up 5 bps at 3.486 per cent. REUTERS
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