German 10-year government bond yields hit fresh multi-week highs on Thursday as investors kept pricing in a patient policy loosening path in the US after the Federal Reserve’s minutes and remarks from rate-setters.
Dallas Fed President Lorie Logan said on Wednesday she supported last month’s outsized cut but wants smaller reductions ahead, given “still real” upside risks to inflation and “meaningful uncertainties” over the economic outlook.
Fed minutes showed that a “substantial majority” supported a 50 bps rate cut in September without committing the Fed to a particular pace of cuts in the future.
Some analysts argued that benign inflation figures, due later in the session, could bolster expectations for Fed rate cuts in November and December.
Money markets currently price in 46 bps of rate cuts by year-end.
Germany’s 10-year bond yield, the benchmark for the euro zone bloc, was up 1.5 bps to 2.27%, after reaching 2.282%, its highest level since Sept. 4.
Markets are pricing in an around 90% chance of a 25 bps rate cut by the European Central Bank in October and 50 bps by year-end.
Euro zone bond yields drop after 4-day rising streak
Most analysts see an ECB rate cut next week as certain, while some argue that a hold scenario cannot be ruled out.
Several ECB policymakers argued their case for a rate cut next week, while Peter Kazimir was critical about the expectation of a done deal and Pierre Wunsch was not yet convinced of such a move.
The ECB’s Gabriel Makhlouf said on Wednesday that persistent services inflation and stronger-than-expected wage growth present upside risks.
Germany’s two-year bond yield, which is more sensitive to ECB rate expectations, was up 2.5 bps at 2.28%, after hitting 2.287%, its highest level since mid-September.
The gap between French and German 10-year yields - a gauge of the risk premium investors demand to hold France’s government bonds - was last at 79 bps, with Prime Minister Michel Barnier set to present the budget bill for 2025 later in the session.
The French yield spread reached its widest since 2012, beyond 85 bps, during France’s elections this summer.
According to a note from Citi, investors will closely watch for details of an expected 60 billion euros in spending cuts to assess the effort’s credibility, the state funding update for 2024 and initial supply targets for 2025.
The overall picture would impact rating decisions starting Friday with a Fitch review.
Also, Portugal’s 2025 budget will be in focus as the minority centre-right government has watered down its proposals for two major tax cuts, aiming to convince the main opposition Socialists to allow the passage in parliament.
The Portuguese yield spread on 10-year maturities tightened slightly to 49 bps. Italy’s 10-year government bond yield rose one bp to 3.57%, and the gap between Italian and German yields was 130 bps.
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