Euro Zone Bond Selloff Amid Trade War Easing

A selloff in euro zone bonds persisted due to reduced expectations of interest rate cuts by the European Central Bank. This followed positive developments in the U.S.-China trade war, which calmed fears of a global slowdown. Germany's bond yields rose, reflecting market adjustments to ECB policy expectations.

The euro zone bond market experienced a continued selloff as investors reassessed their expectations for European Central Bank interest rate cuts. This shift came after a favorable turn in the U.S.-China trade dispute, which alleviated global economic slowdown concerns. Germany's 10-year benchmark yield increased by 3.4 basis points, showing market sensitivity to evolving policies.

Trading began adjusting towards expectations of the European Central Bank's deposit facility rate reaching 1.81% by year's end, marking a shift from the previous estimate of 1.67%. The rate currently stands at 2.25%. Euro zone bonds moved in tandem with other safe-haven assets after a temporary trade agreement between the U.S. and China reduced tensions and tariffs.

There is optimism for further trade agreements, as noted by Max Kettner, HSBC's chief multi-asset strategist. The European Commission is evaluating recent U.S.-UK trade developments for their impact on the EU and global trade. Concurrently, Germany saw a rebound in investor morale in May, post a significant dip in April, according to the ZEW institute.

(With inputs from agencies.)