Germany's two-year yields drop on fears ECB is behind the curve
By Stefano Rebaudo
Oct 23 (Reuters) -Germany’s two-year government bond yields fell on Wednesday and money markets increased their bets on a 50 basis point euro zone interest rate cut in December, with investors expecting the European Central Bank to accelerate its monetary easing cycle.
The ECB could undershoot its inflation target and be at risk of acting too late in unwinding past rate hikes, French central bank chief Francois Villeroy de Galhau said on Tuesday.
ECB policymakers have begun to debate whether interest rates need to be lowered enough to start stimulating the economy, half a dozen sources indicated.
"Every time ECB officials provide dovish comments we see rising expectations for a 50 bp rate cut in December," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, adding that such a move is not the firm's base case scenario.
Markets are now discounting an ECB deposit facility rate at around 2% in June 2025 EURESTECBM5X6=ICAP, compared with 3.5% currently. They have also fully priced in a 25 basis point (bps) rate cut in December EURESTECBM1X2=ICAP and around a 40% chance of a 50 bps move, from around 25% the day before.
"Markets showed a reaction to these comments, but I don't think that the economic outlook justifies a 50 bps rate cut in December," said Bas van Geffen, senior macro strategist at RaboResearch Global Economics and Markets
Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, dropped 6.5 bps to 2.13%. It hit 2.218%, its highest since Oct. 15, on Tuesday.
The yield gap between U.S. 10-year yields and their German equivalents kept widening as markets expect stronger growth and higher rates in the U.S.
It was last at 191.3 bps DE10US10=RR, after reaching 193.76 on Tuesday, its widest level since May 29.
Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, fell 1 bp to 2.31%. It reached 2.334% on Tuesday, its highest since Sept. 3, after rising more than 13 bps in two sessions.
The gap between French and German 10-year yields DE10FR10=RR - a gauge of the risk premium investors demand to hold France's government bonds - was last at 73 bps.
It was around 75 bps before Prime Minister Michel Barnier presented the budget bill for 2025. Markets are now waiting for Moody’s ratings review late on Friday.
Italy's 10-year yield IT10YT=RR was 2 bps lower at 3.55%, and the gap between Italian and German yields DE10IT10=RR was at 123 bps, after hitting 116 bps on Monday, its lowest since June.
DecESTRfwds https://tmsnrt.rs/3NC9b7X
Reporting by Stefano Rebaudo; Editing by Mark Potter, Kirsten Donovan
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