Euro zone government bond yields edged up on Monday, taking cues from US Treasuries as a Moody’s downgrade of the US credit rating underlined concerns about future fiscal policies.
The rating agency move could complicate President Donald Trump’s efforts to cut taxes.
However, Treasury Secretary Scott Bessent on Sunday dismissed Moody’s downgrade, saying the Trump administration would ensure US economic growth outpaced its debt.
Germany’s 10-year yield, the euro zone benchmark, rose 1.5 basis points (bps) to 2.60%. It hit 2.70% last week, its highest level since April 10.
“While Moody’s is catching up with other rating agencies, the downgrade serves as a reminder of the mounting fiscal challenges, and could exacerbate the steepening bias in US Treasuries ahead of this week’s 20-year auction,” said Hauke Siemssen, rate strategist at Commerzbank.
US Treasury yields rose in early London trade, with the 10-year up 7.5 bps at 4.51% after dropping 1.5 bps on Friday.
Barclays expects the downgrade to have limited impact on US Treasuries.
Meanwhile, US President Donald Trump’s sweeping tax-cut bill won approval from a key congressional committee on Sunday.
The measure would extend Trump’s 2017 tax cuts, boost defence spending and provide more funds for his immigration crackdown. Analysts said the tax bill talks would translate into upward pressure on US Treasury yields.
Money markets have priced in a European Central Bank deposit facility rate of 1.75% by year-end.
Euro zone bond yields edge higher after Fed warning, investors await BoE
The ECB may need to cut interest rates to “slightly below” 2% as the euro zone might be exposed to an adverse tariff-induced economic shock in the short term followed by a positive shock in 2026 and 2027, Belgian central bank governor Pierre Wunsch told the Financial Times in a weekend interview. German two-year yields, more sensitive to ECB policy rates, were flat at 1.85%.
Italy’s 10-year yield rose 3 bps to 3.63%.
The spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt – was at 100 bps, after narrowing to its tightest since April 2021 at around 94 bps last week.
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