German bond yields head for largest weekly drop since mid-December

Bond yields plummet: German 10-year bond yields are set for their largest weekly decline since mid-December. This comes as markets increase their expectations for European Central Bank (ECB) rate cuts by 100 basis points in 2024, following the ECB's more optimistic stance on monetary easing.

Following the recent ECB policy meeting, where borrowing costs were maintained at record levels, the central bank hinted at potential future rate cuts while acknowledging progress in reducing inflation.

On Friday, Germany's 10-year government bond yield fell by 1.5 basis points to 2.28 per cent, indicating a weekly decline of 13.5 basis points.

ECB rate confidence

Analysts note that the ECB appears increasingly confident in its ability to implement rate cuts, with expectations for a move by June, supported by projections aiming at reaching a 2 per cent inflation rate.

French ECB Governing Council member, Francois Villeroy de Galhau, indicated that interest rates could be lowered in the spring, suggesting a window from April to June for potential action.

Market indicators suggest a high probability of a rate cut by June, with a smaller chance for such a move in March. Expectations currently point towards a total of 102 basis points in rate cuts by 2024.

ECB's cautionary path

Analysts predict cautious steps from the ECB throughout 2024, possibly pausing in July after a cut in June, followed by gradual easing later in the year and into 2025, due to subdued domestic demand and fiscal constraints.

Attention is also on upcoming US jobs data, which could influence the Federal Reserve's policy trajectory.

In other eurozone news, Italy's 10-year bond yields declined by 1.5 basis points to 3.59 per cent, with the spread over German yields narrowing to 130 basis points, reflecting sustained demand for Italian bonds amidst favourable returns and stable economic conditions.

(With Reuters Inputs)