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.

Euro zone government bond yields showed mixed performance as investors remain cautious ahead of key central bank meetings and potential US-China trade developments. The market's attention is focused on several crucial events that could impact bond yields in the coming days.

Central Bank Meetings in Focus

Investors are closely watching three major central bank meetings:

• The Federal Reserve concludes its two-day policy meeting on Wednesday
• The European Central Bank (ECB) announces its rate decision on Thursday
• The Bank of Japan also releases its policy decision on Thursday

These meetings are expected to provide insights into future monetary policy directions, which could significantly influence bond yields.

ECB Rate Cut Expectations

Market expectations for ECB rate cuts are evolving:

Money markets are pricing in a 52% probability of a 25-basis-point ECB rate cut by September. The key rate is expected to reach 1.90% by December 2026, down from the current 2%.

German Bund Yields

German government bond yields remained relatively stable:

US-China Trade Developments

China's Foreign Minister Wang Yi expressed hopes for the US to meet halfway in preparing for high-level interactions during a call with US Secretary of State Antony Blinken. This development could potentially impact market sentiment and bond yields.

Euro Area Inflation Data

Investors are awaiting key euro area inflation data, which could influence future ECB policy expectations. Recent strong Purchasing Managers' Index (PMI) readings had caused a jump in euro area borrowing costs, with traders pricing in less than a 50% chance of another ECB rate cut next year.

Yield Spreads

The yield spread between German Bunds and French government bonds currently stands at 80 basis points, reflecting the relative risk perception between these two major eurozone economies.

As the market awaits these crucial events and data releases, bond yields are likely to remain sensitive to new information and policy decisions in the coming days.