Euro Zone Bond Yields Drop Amid Economic Jitters

Eurozone bond yields fell following mixed economic data from Europe and the U.S., pointing to a potential economic slowdown linked to U.S. tariffs. Inflation trends remained on track, aiding bond performance, while ECB rate cuts were anticipated. German coalition agreements and U.S. economic contraction also impacted the market dynamics.

Eurozone government bond yields experienced a decline on Wednesday amid mixed economic signals from Europe and the U.S., raising concerns about a tariff-triggered economic slowdown.

Data revealed that while German and French inflation slightly exceeded forecasts, it continued to cool. Analysts at Nomura projected that broader eurozone inflation data, expected on Friday, would align with the European Central Bank's (ECB) 2% target, offering reassurance to the ECB. Support for bonds increased, with Germany's 10-year yield dropping four basis points to 2.45%. Market expectations suggest that the ECB's deposit rate will drop to 1.60% in December, implying potential rate cuts.

Despite a moderately positive eurozone economy outlook at the start of 2025, ECB rate cuts are still anticipated amid potential economic disruptions from U.S. tariffs and shifting business sentiment. The U.S. saw an economic contraction for the first time in three years, exacerbated by import surges. The SPD's coalition deal with CDU/CSU in Germany, paving the way for Friedrich Merz to become chancellor, further influenced bond markets. Expected fiscal spending by the incoming German government could affect future bond yields.

(With inputs from agencies.)