German Bund Yields Rise 6 Basis Points, ECB Rate Cut Uncertainty Looms

German government bonds experienced a decline, mirroring the drop in U.S. Treasuries, which led to a steepening of the yield curve. The 10-year German bund yield rebounded from a three-week low reached over the weekend, with long-term European bond yields rising more than short-term yields. This dynamic pushed the yield curve to steepen further.

The 10-year German bund yield rose by 6 basis points to 2.56%, reversing a decline to 2.50% seen on Friday. The 2-year yield also increased by 3 basis points to 1.81%. Market participants widely anticipate that the European Central Bank (ECB) will cut interest rates by 25 basis points on Thursday. However, the uncertainty surrounding the level of tariffs the U.S. might impose on the EU makes it less likely that policymakers will provide clear guidance on further easing.

Currently, traders expect the ECB to reduce rates by a total of 54 basis points from now until the end of the year, down from an expectation of around 58 basis points a week ago. UK gilts also saw a slight decline, with the 10-year yield rising by 2 basis points to 4.67%.

This movement in bond yields reflects the broader economic uncertainty and the potential impact of geopolitical tensions on financial markets. The steepening of the yield curve indicates that investors are expecting higher long-term interest rates relative to short-term rates, which could signal concerns about future economic growth or inflation.

The decline in German bund prices, with the 10-year bund falling by 4.00 points to 131.17%, further underscores the market's reaction to these developments. The yield on 10-year Italian bonds rose by 2 basis points to 3.50%, keeping the spread between Italian and German bonds stable at 98 basis points. The yield on 10-year French bonds increased by 3 basis points to 3.19%.

These movements in European bond markets highlight the interconnected nature of global financial markets and the influence of U.S. monetary policy on European economies. The anticipation of further rate cuts by the ECB, coupled with the uncertainty surrounding U.S. tariffs, has created a complex environment for bond investors. As policymakers navigate these challenges, the yield curve's steepening and the decline in bond prices will continue to be closely watched by market participants.