Central Bank Policies and Bond Yield Fluctuations Amid Economic Uncertainty

Euro area bond yields hit their lowest level since February due to anticipated central bank policy easing. U.S. manufacturing slowdown and economic uncertainties spurred declines in U.S. Treasury yields. Federal Reserve foresees potential rate cuts, while European Central Bank expects multiple rate cuts by 2024. Bond yields in France, Spain, and Germany showed varied reactions to economic conditions.

In a week marked by economic uncertainty, Euro area benchmark Bund yields plunged on Thursday to their lowest level since early February, driven by investor focus on potential central bank policy easing amid weak economic data from both the U.S. and Europe. The yields were set for a fourth consecutive weekly decline, reaching their steepest fall since mid-June.

U.S. manufacturing activity dropped to an eight-month low in July due to a slump in new orders, causing a sharp decline in U.S. Treasury yields. In response, the Bank of England slashed rates from a 16-year high following a closely contested vote among policymakers on whether inflationary pressures were sufficiently subdued.

Jerome Powell, Federal Reserve Chair, hinted at possible interest rate cuts as early as September if the U.S. economy continues its predicted path. Meanwhile, Germany's 10-year yield, which serves as the benchmark for the euro zone, fell to its lowest since early February. The spread between U.S. Treasuries and German Bunds also narrowed, reflecting market responses to varying economic forecasts and policy expectations.

The European Central Bank is poised to implement two 25 bps rate cuts, with a possible third in 2024. Italy, France, and Spain saw varying growth rates, with Italian government bond yields falling and the gap between French and German yields widening amid political uncertainties. Markets now fully expect additional Bank of England rate cuts by November, following meeting-by-meeting, data-dependent forward guidance.

(With inputs from agencies.)