Interest Rate Clues Anticipated Amid Bond Yield Fluctuations

Euro zone government bond yields increased, reversing earlier declines, as investors await European Central Bank and U.S. Federal Reserve meetings for interest rate insights. The focus is on ECB's potential rate cuts, influenced by inflation concerns and hawkish views on neutral rates. Market responses include yield changes in Germany and Italy.

Euro zone government bond yields rose on Tuesday, reversing Monday's decline. This shift comes as investors eagerly await policy meetings from the European Central Bank (ECB) and the U.S. Federal Reserve later this week to gauge future interest rate directions.

Monday saw borrowing costs drop across the Atlantic as investors turned to safe-haven assets in response to concerns about high valuations in U.S. tech stocks. Bond prices, which move inversely to yields, were affected as Nasdaq experienced its largest one-day drop since December 18, following a selloff prompted by a Chinese AI model impacting U.S. chipmakers.

In reaction, Germany's 10-year bond yield climbed 5 basis points after a 4 bps fall the previous day. Market speculation centers on a potential ECB rate cut of 25 bps on Thursday, with projections for a deposit rate of 2.1% by the end of 2025, down from 3%. Analysts suggest further rate cuts, possibly 50 bps, as inflation worries recede, though ECB hawks debate the extent of the cuts given a neutral rate estimated between 1.5 and 3%.

(With inputs from agencies.)