Germany's two-year yields drop on fears ECB is behind the curve
Updates prices at 1510 GMT
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-pointeuro 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.
Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, dropped 6 bps to 2.144% as investors slightly nudged up their bets on a 50 bp rate cut in December. It hit 2.218%, its highest since Oct. 15, on Tuesday.
"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.
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 192.2 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, was flat at 2.322%.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 slightly tighterat 72 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 121 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 and Ed Osmond
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