UPDATE 1-Bund yields head for fourth weekly drop as investors seek safety

Bund yields were on track for a fourth straight weekly drop, as investors sought safe-haven assets amid mounting concerns over a U.S. government shutdown, renewed U.S.-China trade tensions, and new signs of credit stress in the U.S. banking sector.

Bund yields were on track for a fourth straight weekly drop, as investors sought safe-haven assets amid mounting concerns over a U.S. government shutdown, renewed U.S.-China trade tensions, and new signs of credit stress in the U.S. banking sector. Yields across the bloc edged higher late on Friday, after hitting multi-month lows early in the session, as Wall Street futures trimmed losses after U.S. President Donald Trump confirmed his meeting with Chinese President Xi Jinping was still on.

Trump said on Friday his proposed 100% tariff on goods from China would not be sustainable, adding that he would meet with Chinese President Xi Jinping in two weeks and that he thought things would be fine with China. U.S. bank stocks, including Zions Bancorporation, Jefferies, and Western Alliance, fell sharply on Thursday as investors grew uneasy about risk in the sector, which has been shaken by exposure to two auto bankruptcies.

Germany’s 10-year Bund yields, the euro area’s benchmark, were flat at 2.57%, after hitting 2.523% early in the session, its lowest since June 25. They were set to end the week 6 basis points lower, in their fourth straight weekly loss. “The latest round of tit-for-tat trade measures between the US and China reminds us that uncertainty may have reduced, but it never really went away after the surge in the first half of 2025, and we are far from normalization,” said Ruben Segura Cayuela, economist at BofA.

“We think this persistent uncertainty is a significant headwind to the Euro area and the global economy that is being somewhat underestimated,” he added. Money markets ramped up bets on European Central Bank rate cuts, amid concerns that trade tensions and credit stress could weigh on economic growth.

They priced in about a 70% chance of a 25-basis-point ECB rate cut by July. The depo rate is seen at 1.80% in December 2026 from the current 2%. “While concerns over credit should not be dismissed there’s doesn’t seem to be any reason for economists to revaluate their economic outlooks at this stage,“ said Paul Donovan, chief economist at UBS Wealth Management, referring to the potential impact of credit risks.

Germany’s 2-year yields, more sensitive to expectations for ECB policy rate outlook, dropped 0.5 bps to 2.01%. The yield gap between safe-haven Bunds and 10-year French government bonds - a market gauge of the risk premium investors demand to hold French debt - widened to 77 bps.

It hit 87.96 bps earlier this month, the highest level since January 13, on concerns about the French fiscal outlook but fell to below 75 bps after Prime Minister Sebastien Lecornu survived two no-confidence votes in parliament on Thursday. Italy’s 10-year bond yields rose 1.5 bps to 3.37%, after hitting a fresh 10-month low at 3.342%.