Euro zone government bond yields fell on Monday after U.S. economic data moved the needle on market bets toward a higher chance of two Federal Reserve rate cuts in 2024.
At the same time, the spread between Italian and German 10-year bond yields hit its lowest level in a month and a half after Fitch affirmed its rating of Italian debt.
The yield on German 10-year bonds, the benchmark for the euro zone, fell 1.5 basis points (bps) to 2.49%.
The Italian 10-year yield fell 6.5 basis points to 3.76%, and the spread between Italian and German 10-year yields – a measure of the risk premium investors demand for holding bonds of the most indebted countries in the euro zone – was 130 basis points after reaching 122.60 basis points, its lowest level since March 20.
The spread between 10-year U.S. Treasury yields and German Bund yields – an indicator of the expected divergence between the European Central Bank and the Fed – narrowed to 200 basis points.
Money markets are pricing in around 75 basis points of rate cuts from the ECB in 2024 and 47 basis points from the Fed, implying a 25 basis point cut and a 90% chance of a further cut in 2024 .
The yield on 2-year German bonds, more sensitive to the ECB’s rate expectations, was down 4 basis points at 2.89%.
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