Bund yields at two-month lows before US data, Munich Conference in focus

Money markets ‌priced in a 30% chance of an ECB cut to interest rates by December after around 20% early this week. Germany’s 10-year government bond yield, the euro area’s benchmark, dropped 0.5 basis points to 2.77%, after hitting 2.76%, its lowest since December 4.

Euro area benchmark Bund yields held at their lowest levels in ​over two months on Friday and were set for their ​biggest weekly drop since March ahead of ‌U.S. ​economic data due later in the session.

Markets have been tracking U.S. Treasuries, but the European Central Bank is expected to keep policy on hold this year, even if traders have slightly increased ‌their bets for a rate cut by December 2026. Some economists argue that the deflationary impact of a strong euro could muddy the ECB's "good place" and prompt the central bank to ease monetary policy.

Bets on ECB rate cuts have shifted, with markets now expecting the first move in December ‌rather than September after President Christine Lagarde last week played down the impact of dollar moves on future policy decisions. Money markets ‌priced in a 30% chance of an ECB cut to interest rates by December after around 20% early this week.

Germany's 10-year government bond yield, the euro area's benchmark, dropped 0.5 basis points to 2.77%, after hitting 2.76%, its lowest since December 4. It was on track for an 8 bps weekly fall. U.S. Treasury yields edged ⁠up ​in early London trading, with benchmark 10-year ⁠paper up one bp at 4.12% after falling the previous day on labour market data.

"Bunds are tracking U.S. Treasuries more than domestic data," said Jamie Searle, European ⁠rate strategist at Citi. "Thinking further ahead, European fiscal policy, defence spending and issuance is likely to remain a key theme throughout 2026," he added.

Investors will ​be watching the Munich Security Conference, taking place over the weekend, for signals on whether EU leaders are prepared to take ⁠meaningful steps to bolster Europe's economic outlook and accelerate defence spending. U.S. inflation data due later in the session remain the immediate focus for markets.

"Our economists expect an increase ⁠of ​0.3% monthly for both the headline and core rate," said Rainer Guntermann, strategist at Commerzbank. "While this outcome is unlikely to revive expectations of a Federal Reserve rate cut in March, even when looking through the noise of the special factors, the case for further ⁠rate cuts down the road remains strong," he added.

Germany's two-year yield, more sensitive to expectations for policy rates, was down one basis point ⁠at 2.02%. Italy's 10-year government bond ⁠yields fell 0.5 basis points (bps) to 3.39%. The gap versus Bunds was at 60 bps after falling to 53.50 bps in mid-January, its lowest since August 2008. Analysts mentioned progress on European financial integration as a ‌key factor for ‌further tightening in euro area yield spreads.

(reporting by Stefano Rebaudo; Editing ​by David Goodman and Jane Merriman)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)