Euro zone government bond yields saw a slight increase on Thursday, reflecting ongoing economic uncertainties in the region's largest economy, Germany. The movement in bond yields comes as markets reassess expectations for interest rate cuts by major central banks.

German Bonds and Economic Outlook

Germany's 10-year bond yield, a benchmark for the euro area, rose by 0.50 basis points to 2.65%. This uptick follows recent German economic data that has cast doubt on the timing and scale of Germany's planned boost in defense and infrastructure spending.

Adding to the economic uncertainty, the German Council of Economic Experts has revised its growth forecasts:

Central Bank Rate Cut Expectations

Market expectations for interest rate cuts have been adjusted:

These shifts in expectations reflect the complex economic landscape that central banks are navigating.

Italian Bonds and Spread

Italy's government bonds also saw movement:

The tightening spread between Italian and German bonds suggests a reduction in perceived risk differential between these two key euro zone economies.

The current bond market movements underscore the delicate balance between economic growth prospects and monetary policy expectations in the euro zone. Investors and policymakers alike are closely monitoring economic indicators and central bank signals for clues about future financial market trends.

Euro zone government bond yields have seen an uptick, continuing a two-week climb as investors turn their attention to upcoming US manufacturing ISM data and monitor trade developments following a fragile US-China truce.

Key Bond Yield Movements

• Germany's 10-year benchmark yields rose 0.50 basis points to 2.64%
• Last week, these yields reached 2.66%, the highest since October 10
• Germany's 2-year yields remained roughly unchanged at 1.99%

Market Expectations and Pricing

Money markets are currently pricing in:

• Approximately 50% probability of a 25-basis-point ECB rate cut by September 2026
• Key rate expected at 1.90% in December 2026, down from the current 2.00%

Factors Influencing the Bond Market

1. Central Bank Positioning: Recent signs of hawkish positioning from both the Federal Reserve and the European Central Bank have contributed to the rise in euro area borrowing costs.

2. US-China Trade Developments: Investors are closely watching the fragile truce between the US and China, which could impact global economic outlook and, consequently, bond yields.

3. Upcoming US Manufacturing Data: The market is anticipating the release of US manufacturing ISM data, which could provide insights into the health of the US economy and influence bond yields.

Yield Spreads and Legislative Developments

• The yield spread between German Bunds and French government bonds stood at 78.50 basis points.
• In France, lawmakers rejected proposals for a wealth tax on the ultra-rich during budget debates, which could have implications for the country's fiscal policy and bond market.

This recent uptick in bond yields reflects the complex interplay of global economic factors, central bank policies, and geopolitical developments. Investors should continue to monitor these trends closely as they navigate the euro zone bond market.