German ten-year bond yields have reached their lowest level this year thanks to interest rate cuts
German 10-year yields, the benchmark for the euro zone, fell to their lowest level in a year on Wednesday as investors returned from the holiday season betting rates will fall sharply next year.
Ten-year yields fell as much as 7 basis points (bps) to 1.898%, the lowest since December 2022 and below March levels, as concerns about the health of the banking system prompted investors to seek safe haven.
Yields move inversely to prices.
Italian 10-year government bond yields, which hit a new 16-month low during the day, were last four basis points lower at 3.51%. more cuts,” said Emmanouil Karimalis, macro interest rate strategist at UBS.
“This sentiment is quite bullish for bonds.” Larger-than-expected declines in inflation in the US and Europe, combined with a change in central bank tone, have led markets to price in sharply lower borrowing costs in 2024 after the rate hike cycle of the past two years.
Investors on Wednesday expected the European Central Bank to cut interest rates by about 165 basis points next year from the current record 4%, prices on derivatives markets showed.
That was slightly higher than last week and much higher than the approximately 140 basis points priced in on December 15.
UBS's Karimalis said the market may be leading the way in estimating a greater than 70% chance of the ECB's first rate cut in March, thinking April is more likely.
The difference between the Italian and German ten-year yields was 154.1 bp, the smallest since June, but last widened slightly, at 158 bp. The spread is seen as an indicator of investor confidence in the more indebted countries in the euro zone.
A huge bond rally has boosted the riskier parts of the market the most, with Italy's 10-year yield on track for its biggest monthly decline since 2013, at 75 basis points.
German two-year government bond yields, which are sensitive to interest rate expectations, fell 1 bp to 2.40%, the lowest level since March.
First print: December 27, 2023 | 10:33 PM IST