Euro zone bond yields dip; interest rate expectations in focus
TLT•Euro zone government bond yields edged lower on Thursday, while Germany’s 10-year yield remained set for a roughly 5-basis-point weekly rise. Markets priced an 80% chance of a 25-basis-point European Central Bank rate hike in December.
1. Yields edge lower
Germany’s 10-year government bond yield fell 2.4 basis points to 3.2993%, but was still on track for a roughly 5-basis-point weekly increase after four weeks of declines. Germany’s two-year yield, which is more sensitive to rate expectations, dropped 3.5 basis points to 3.0878% and was set for a nearly 13-basis-point weekly rise. Italy’s 10-year yield fell 2.5 basis points to 4.336%, as Italy sold €7.25 billion of medium- and long-term bonds to decent demand.
2. Rate expectations in focus
A hotter-than-expected US inflation reading earlier in the week lifted Treasury yields and prompted traders to increase bets on Federal Reserve rate hikes, with some of the moves spilling into Europe. Markets were pricing an approximately 80% chance of a 25-basis-point ECB increase in December and two ECB hikes by mid-2027. Most economists polled expected a December increase to end the ECB’s hiking cycle, while more than a third expected another increase in early 2027.
