Euro zone government bond yields remained largely steady on Monday as investors closely watched U.S. Treasury movements in the wake of a government shutdown that began after the Senate rejected a short-term spending measure.

Key Points

• Germany's 10-year Bund yields held around 2.02%
• Euro zone inflation data showed acceleration, but aligned with ECB projections
• Market expectations indicate a 30% chance of a 25 basis point ECB rate cut by July
• Yield gap between German Bunds and French government bonds widened to near seven-month highs

Euro Zone Inflation and ECB Projections

The latest euro zone inflation data revealed an acceleration, yet remained consistent with the European Central Bank's (ECB) projections. The ECB forecasts core inflation at 2.20% and headline inflation at 2.00% in the fourth quarter, aligning with the recent data.

Market Expectations and Rate Cut Probability

Investors are pricing in about a 30% chance of a 25 basis point ECB rate cut by July. Looking further ahead, market projections suggest rates could reach 1.98% by February 2027, down from the current 2.00% level.

US Government Shutdown Impact

The ongoing U.S. government shutdown, which began after the Senate's rejection of a short-term spending measure, is being closely monitored by investors. The impact of this shutdown on financial markets will largely depend on its duration. One key concern is the potential delay in the release of important economic data.

Franco-German Bond Spread Widens

The yield gap between German Bunds and French government bonds has expanded to 82 basis points, approaching seven-month highs. This widening comes in the wake of France's new Prime Minister targeting a budget deficit of approximately 4.70% of GDP in 2026.

Outlook

As the situation unfolds, market participants will continue to watch for any developments in the U.S. government shutdown and its potential ripple effects on global bond markets. The ECB's future policy decisions and the trajectory of euro zone inflation will remain key factors influencing bond yields in the coming months.

Euro zone government bond yields held their ground in early Monday trading as investors brace for a week packed with crucial US economic data releases and substantial bond issuances across the region.

US Inflation Data in Focus

Market participants are keenly awaiting Friday's release of the personal consumption expenditures (PCE) price index, the Federal Reserve's preferred gauge of inflation. This data point is expected to provide insights into the trajectory of US monetary policy and its potential impact on global bond markets.

Bond Yields and Upcoming Issuances

Germany's 10-year bond yield edged up by 1 basis point to 2.76%, while the US 10-year Treasury yield stood at 4.14%. The slight uptick in German yields follows last week's announcement of increased debt issuance by the country.

The week ahead is set to see approximately 30 billion euros worth of bond sales, including:

• New 30-year Dutch debt
• 10-year Italian bonds

This substantial issuance calendar could potentially influence yield movements across the euro zone.

French and Italian Yield Dynamics

French 10-year yields rose by 0.9 basis points to 3.57%, while Italian 10-year yields remained steady at 3.57%. Notably, French yields briefly surpassed Italian yields last week for the first time following France's credit rating downgrade.

Central Bank Watch

Investors are also monitoring central bank developments:

• Multiple Federal Reserve policymakers are scheduled to speak throughout the week, potentially offering insights into future monetary policy decisions.
• The Swiss National Bank is set to meet on Thursday, with market expectations leaning towards maintaining its benchmark rate at 0%.

Market Sentiment

The current stability in bond yields comes after a week of volatility triggered by:

1. Germany's announcement of increased debt issuance
2. Policy decisions from the Federal Reserve and Bank of England

As the week unfolds, market participants will closely watch the interplay between economic data, central bank communications, and bond issuances to gauge the direction of euro zone government bond yields.