Euro Zone Bond Yields Rise

By Harry Robertson
LONDON (Reuters) – Euro zone government bond yields rose to their highest level in around a month on Monday as investors continued to assess the outlook for central bank rate cuts in 2025.

The Federal Reserve last week increased pressure on U.S. government bond yields, which influenced global markets, with policymakers now expecting to cut rates twice in 2025, revising from a previous estimate of four cuts.

Germany’s 10-year bond yield, the euro zone benchmark, increased to 2.327% on Monday, the highest since November 22, rising approximately 4 basis points (bps). Yields move inversely to prices.

Lower trading volumes due to the holiday season might have exaggerated price changes.

European Central Bank (ECB) President Christine Lagarde indicated the euro zone is nearing its medium-term inflation target in an interview with the Financial Times on Monday.

The ECB reduced rates to 3% this month; however, bond yields rose as Lagarde adopted a tougher tone than anticipated, emphasizing that the battle against inflation is ongoing.

Lagarde noted that while headline inflation was at 2.2%, services inflation remained stubborn at 3.9%. Irish central bank chief Gabriel Makhlouf expressed concern over aspects of services inflation in the euro zone.

Germany’s two-year bond yield, sensitive to ECB rate expectations, rose 3 bps to 2.071%. Italy’s 10-year yield increased by 5 bps to 3.50%, peaking at 3.503%, its highest since November 25, with a gap of 117 bps between Italian and German yields.

Investors face uncertainty in 2025, particularly with U.S. President-elect Donald Trump’s policies acting as a wild card.

Money market pricing on Monday suggested investors expect around 115 bps of rate cuts from the ECB next year, showing little change from Friday.