 "bond yields")
Germany's 10-year bond yield, the euro zone benchmark, fell to its lowest level in a year on Wednesday as investors returned from the holiday break raising bets that interest rates will fall sharply next year.
The 10-year yield dropped as much as 7 basis points (bps) to 1.898%, its lowest since December 2022 and below the level in March, when concerns about banking system health sent investors scrambling to the safe haven asset.
Yields move inversely to prices.
Italy's 10-year bond yield, which hit a fresh 16-month low during the day, was last 4 bps lower at 3.51%, "What dominates right now in the market is obviously that disinflation is underway and the fact that the market is pricing more cuts," said Emmanouil Karimalis, macro rates strategist at UBS.
"This sentiment is quite bullish for bonds." Bigger-than-expected drops in inflation in the U.S. and Europe, combined with a change in tone from central banks, have led markets to price in sharply lower borrowing costs in 2024 after the rate-hiking cycle of the last two years.
"This sentiment is quite bullish for bonds." Bigger-than-expected drops in inflation in the U.S. and Europe, combined with a change in tone from central banks, have led markets to price in sharply lower borrowing costs in 2024 after the rate-hiking cycle of the last two years.
Investors on Wednesday were expecting the European Central Bank to cut interest rates by around 165 bps next year, from the current record high of 4%, prices in derivatives markets showed.
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That was up slightly from last week and much higher than the roughly 140 bps priced in on Dec. 15.
UBS' Karimalis said the market may be getting ahead of itself in pricing a more than 70% chance of the first ECB rate cut in March, believing April to be more likely.
The gap between Italy's and Germany's 10-year yields touched 154.1 bps, its narrowest since June, but was last a touch wider at 158 bps. The spread is seen as a gauge of investor confidence in the euro zone's more indebted countries.
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 fall since 2013, at 75 bps.
Germany's 2-year bond yield, which is sensitive to interest rate expectations, was down 1 bp at 2.40%, its lowest since March.
