German 10-year yield below 2% as government bond rally continues

Euro zone bond yields continued to fall on Wednesday on expectations of rate cuts next year, with Germany's 10-year yield below 2 per cent for the first time since March, and the gap between Germany and Italy's 10-year yields at its narrowest since late June.

Markets are now pricing in more than 160 basis points of interest rate cuts from the European Central Bank in 2024, raising them slightly on Wednesday, which analysts at Rabobank said was prompted by weaker than expected UK inflation data.

"We have an inkling that market participants have been unwilling to fight an increasing pricing in of cuts heading into year-end but, at a tactical level, this could well be reversed when participants return to their desks in 2024," Rabobank analysts said.

British data showed that consumer inflation plunged to 3.9 per cent from 4.6 per cent in October, its lowest reading in two years.

Germany's 10-year yield dipped 3 basis points to 1.986 per cent on Wednesday, hitting its lowest since March of this year.

The euro zone benchmark yield is already down 46 bps in December, which would be its biggest monthly fall in nearly a year and a half, driven by markets ramping up bets for interest rate cuts in Europe and the US next year.

Italy's 10-year yield was last down 3 bps at 3.62 per cent. It is down more than 60 bps this month, which would be its biggest monthly fall since 2013.

The recent large fall in Italian yields helped further narrow the gap between Germany and Italy's 10-year government bond yields, which fell to 156.7, its tightest since June.

Shorter dated bonds also rallied and the German two-year yield was down 6 bps at 2.46 per cent, and the Italian two-year yield was down 5 bps at 3.01 per cent.