Market Analysis

Euro Zone Yields Set for Largest Weekly Decline Since Mid-March Following ECB Rate Cut and US Data

Amos Simanungkalit · 07 Jun 202419.2K Views

Euro zone government bond yields rose slightly on Friday, poised to record their largest weekly decline since mid-March following the European Central Bank's rate cut and disappointing U.S. economic data.

Investor sentiment shifted as the ECB's statements prompted a moderation in expectations for future monetary easing, which had surged in anticipation of the central bank's policy decision.

Germany's benchmark 10-year yield was up 1 basis point at 2.55%, set for a weekly decrease of 9.5 basis points. Last week, it had reached a peak of 2.707%, the highest in over six months.

Market projections indicated approximately 60 basis points of ECB rate cuts in 2024, reflecting two anticipated reductions including the recent one, with a 40% likelihood of a third cut by year-end.

The 2-year German government bond yield, more sensitive to rate expectations, increased 1.5 basis points to 3.03%, reaching its highest level since mid-November at 3.125% on Friday.

Meanwhile, Italy's 10-year yield rose by 1 basis point to 3.87%.

The yield spread between Italian and German bonds, a measure of risk premium for holding debt from the euro area's most indebted nations, stood at 131 basis points. It had hit a low of 115.4 basis points in March, the narrowest in 15 months.

The gap between U.S. and German 10-year yields, reflecting expectations of divergence in monetary policies between the Federal Reserve and the ECB, narrowed to 177.9 basis points from about 195 basis points the previous week.