Euro Zone Bond Yields Rise as ECB Rate Cut Bets Adjust

Euro zone government bond yields increased after a sharp fall, influenced by investor adjustments in bets on European Central Bank rate cuts ahead of the upcoming policy meeting. Despite an anticipated 25 basis points easing, uncertainties about future rate directions persist. Germany's 10-year yield remained stable, while Italy's rose slightly.

Euro zone government bond yields edged up on Tuesday after falling sharply the day before as investors reduced their bets on future European Central Bank rate cuts ahead of this week's policy meeting. Market participants take a monetary easing of 25 basis points for granted, but there is a lot of uncertainty about the rate outlook after June.

Money markets priced in 60 basis points of ECB rate cuts in 2024 - from less than 55 bps early on Monday - which imply two moves and an around 40% chance of a third move by year-end. Germany's 10-year yield, the bloc's benchmark, was flat at 2.58%, after dropping 6.5 basis points (bps) the day before in its biggest daily fall since May 15.

Germany's 2-year government bond yield, more sensitive to policy rate expectations, was up 0.5 bps at 3.04%. Italy's 10-year yield rose one bp to 3.90% after falling 9 bps on Monday, its biggest daily drop since May 15.

The yield gap between Italian and German bonds , a gauge of the risk premium investors seek to hold bonds of the euro area's most indebted countries, was roughly unchanged at 131 bps. The spread between U.S. and German 10-year yields - a gauge of expectations for monetary policy divergence between the Fed and the ECB – widened to 182 bps.