Euro zone yields struggle for direction as markets increase bets on Fed rate cut
By Stefano Rebaudo
Sept 16 (Reuters) -Euro zone government bond yields were mixed on Monday as money markets increased their bets on a super-sized 50 basis point rate cut by the Federal Reserve on Wednesday.
The Bank of England and the Bank of Japan will also hold their policy meetings later this week and are expected to keep rates at the current levels.
Money markets fully priced 25 basis points of rate cuts and a 59% chance of a 50 bps move, from around 50% late last week, according to the CME FedWatch tool. FEDWATCH
"A rate cut of more than 25 bps seems unlikely -- while the Fed is late in cutting rates, a larger move might be taken as a sign of panic," said Paul Donovan, chief economist at UBS Global Wealth Management.
"Higher frequency cuts rather than larger cuts seem most likely," he added.
Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone bloc, was up one basis point (bp) at 2.16%.
Citi mentioned Fed Governor Christopher Waller, saying he was open-minded about the size and pace of rate cuts after data showed U.S. employment increased less than expected in August.
"These comments would suggest that the Fed wants to start with small cuts while preserving the optionality to go in bigger steps later," said Jabaz Mathai, head of G10 rate and forex strategy at Citi. "Election timing would also justify a conservative start."
Investors will focus on remarks by Fed Chair Jerome Powell, no matter what the Fed decides on rates.
The Fed decision "is likely to be wrapped up in dovish talk at the press conference," Citi's Mathai added. "Easing financial conditions, or at the very least not tightening them, would be the desired result."
Markets priced in 37 bps of European Central Bank rate cuts by year-end EURESTECBM2X3=ICAP, implying a 25 bps move and an around 50% chance of a second cut.
Italy's 10-year yield IT10YT=RR was 0.5 bps lower at 3.51%, and the gap between Italian and German Bunds DE10IT10=RR -- a gauge of the risk premium investors demand to hold Italian government bonds -- stood at 135 bps.
Investors closely watch political developments in Italy and France, as the European Union has placed the two countries under a so-called Excessive Deficit Procedure this year.
Italy plans to confirm a commitment to bring its deficit-to-GDP ratio below the EU's 3% ceiling in 2026 in its medium-term structural budget plan to be presented by mid-September.
France's deteriorating public finances will be a major challenge for new Prime Minister Michel Barnier, who faces tough choices such as cutting spending, raising taxes, or losing credibility with EU partners and financial markets.
Reporting by Stefano Rebaudo, editing by William Maclean
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
