Euro area 2-year yields set for largest weekly drop since September

Germany's rate-sensitive two-year bond yield, was down 81 basis points (bps) at 2.18% on Friday. It was set to end the week 16 bps lower in its biggest fall since the week of Sept. 23

Euro zone short-dated government bond yields were on track to record their biggest weekly drop in months, after a raft of weak economic data led traders to ramp up their bets on future rate cuts from the European Central Bank. 

Borrowing costs inched higher early on Friday, after falling the day before, when the ECB's policy decision barely moved expectations for the outlook for interest rates. 

Germany's rate-sensitive two-year bond yield, was down 81 basis points (bps) at 2.18 per cent on Friday. It was set to end the week 16 bps lower in its biggest fall since the week of Sept. 23. 

"The ECB will likely want to provide further support to the weak euro zone economy. German data from today's soft retail sales while the unemployment rate is edging up – also fit this view," said Salomon Fiedler, economist at Berenberg.

Money markets priced in an ECB deposit facility rate at 1.95 per cent at the end of 2025 - which implies

three 25-bp cuts and a 20 per cent chance of a fourth by year-end -, from over 2.1 per cent early this week. 

Germany's core inflation eased markedly, while the unemployment rate rose as the weakness of Europe's biggest economy took its toll on the labour market. 

French consumer prices increased slightly less than anticipated to 1.8 per cent year on year. 

"We expect overall inflation in France to remain close to the current level on average over 2025 before returning to close to 2 per cent in 2026," said Charlotte de Montpellier, senior economist, France and Switzerland at ING. 

Data showed on Thursday the economy contracted spurring recession fears in Germany, while Italy stagnated and French growth retreated slightly. 

Germany's 10-year government bond yield, the euro area's benchmark, fell 6 bps to 2.457 per cent, and was about to end the week 6 bps lower. 

However, euro zone consumers and economists increased their inflation expectation for this year, surveys showed on Friday. 

U.S. Treasury yields edged up with the 10-year rising one bp to 4.52 per cent, as data showed U.S. prices increased in December while consumer spending surged. 

The yield spread between OATs and Bunds - a market gauge of the risk premium investors demand to hold Italian debt - tightened to 74 bps, after French Finance Minister Eric Lombard said on Friday that talks on getting the 2025 budget passed through parliament were "on the right track". 

It widened to around 90 bps, its highest since 2012, in mid-January and end-November amid fears that France would be unable to cut its growing budget deficit. 

Italy's 2-year government bond yield posted its biggest fall since mid-October, 8 bps lower to 2.44 per cent. 

The gap between Italian and German 10-year yields was at 109.1 bps, not far from its lowest level since October 2021 at 104.50 bps.  (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)