Yields for Euro zone bonds fall again as markets up bets on rate cuts

The Euro zone government bond yields fell to multi-month lows on Wednesday, on the back of investors upping bets that interest rates will fall sharply next year.

Germany's 10-year yield, which happens to be the benchmark for the euro zone, was down 4 basis points (bps) at 1.931 per cent. 

The yield, moving inversely to price, fell to its lowest since March earlier in the session at 1.931 per cent.

Italy's 10-year bond yield was last 4 bps lower at 3.507 per cent after it fell to its lowest since 2022 at 3.49 per cent.

"What dominates right now in the market is obviously that disinflation is underway and the fact that the market is pricing more cuts," Emmanouil Karimalis, macro rates strategist at UBS told Reuters.

This sentiment is quite bullish for bonds, Karimalis added.

Bigger than expected drops in inflation in the US and Europe, combined with a tone change from central banks have resulted in markets pricing sharp falls in borrowing costs next year 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 per cent as per prices in derivatives markets.
 
That was up slightly from last week and much higher than the roughly 140 bps priced in on December 15.

The gap between Italy's and Germany's 10-year yields was last at 155 bps, around its narrowest since June. 

A huge bond-market rally has boosted the riskier corners of the bond market the most, with Italy's 10-year yield on track for its biggest monthly fall since 2013, at 74 bps.

Germany's 2-year bond yield, which is sensitive to interest rate expectations, was flat at 2.415 per cent, which happens to be just above its lowest since March.

(With Reuters Inputs)