Euro zone yields fall on expectations for central banks slower tightening

Euro zone borrowing costs fell on Monday on expectations that central banks might slow down the pace of their monetary tightening early next year.

Yields dropped on Friday after a media report indicated that the Federal Reserve, which is set to approve another significant interest rate hike early next month, is shifting to a debate over how and when to slow the pace of future increases.

Analysts focused on this week’s European Central Bank (ECB) policy meeting, which is widely expected to deliver a 75 basis points (bps) rate hike and additional measures to reduce excess liquidity, which might affect market rates.

Germany’s 10-year government bond yield, the benchmark of the bloc, dropped by 10 bps to 2.33%. It hit its highest since August 2011 on Friday at 2.532%.

“Bunds have chances to extend the tentative stabilization, also with PMIs (data) likely to weaken today and the euro rebounding,” Commerzbank analysts said in a note to clients.

Euro zone bond yields rise, focus on economic data

Euro area yields have risen on expectations of more issuance needs due to the potential for more national spending to support the countries’ economies while the ECB keeps its hiking stance.

However, several analysts recently argued that an economic slowdown coupled with a peak in headline inflation early next year might support a pause in the ECB monetary tightening path. S&P Global’s flash Composite Purchasing Managers’ Index (PMI) for October is due at 0800 GMT.

“The euro zone composite PMI for October is likely to drop further into contractionary territory, to 47.5 from 48.1, pointing to an increasing likelihood that a recession will start in 4Q22,” according to Unicredit analysts. Italy’s 10-year government bond yield fell 13 bps to 4.62%.

The spread between Italian and German 10-year yields tightened to 228 bps after Giorgia Meloni was named Italy’s first woman prime minister and chose her cabinet team, setting her seal on the country’s most right-wing government since World War Two.

The economy minister is Giancarlo Giorgetti, the minister of economic development in the government led by former ECB president Mario Draghi. Meloni wanted a technocrat and offered the post to ECB board member Fabio Panetta, but he turned her down.