Euro zone yields hit multi-month lows as markets increase bets on rate cuts -December 04, 2023 at 10:44 am EST

LONDON, Dec 4 (Reuters) – Euro zone government bond
yields hit fresh multi-month lows on Monday as market bets on
interest rate cuts ramped up following economic data and
comments from European and U.S. policymakers last week.

Greece’s 10-year yield fell to its lowest since August 2022
after Fitch upgraded the country’s credit rating to investment
grade, following a similar move by S&P Global in October.

Bloomberg quoted European Central Bank rate setter Francois
Villeroy de Galhau saying at a conference on Friday that barring
any shock, rate hikes were now over, adding that the central
bank may consider cutting interest rates next year as the
process of disinflation had been “faster than expected”.

Euro zone inflation eased to 2.4% in November from 2.9% in
October, data showed last week, prompting bets that the ECB will
begin cutting interest rates sooner than previously thought.

Germany’s budget crisis has dealt another blow to an already
battered economy, the president of the ZEW economic research
institute said on Monday.

ECB euro short-term rate (ESTR) forwards price almost 140
basis points of rate cuts by end-2024,
from around 90 basis points at the start of last week.

Markets are also pricing in around an 85% chance that the
ECB will begin cutting interest rates in March
, from around a 40% chance a week ago.

“Central banks are coming down from rate hikes and that risk
is being priced out,” said Anders Svendsen, chief analyst at
Nordea. “If you think there’s a very low risk of rate hikes,
then you need to position for lower rates.”

Germany’s 10-year yield, the euro area’s
benchmark, was last down 4.5 bps at 2.318%, having dropped to
2.313% earlier, its lowest since July 19.

Germany’s policy-sensitive 2-year yield was 2 bps
lower at 2.64%, its lowest since May 16.

Policymakers have tried to pour cold water on easing
expectations with ECB Vice-President Luis De Guindos and German
rate setter Joachim Nagel both saying it was too early to
declare victory over inflation.

Markets are also pricing in rate cuts from the Federal
Reserve early next year even as Chair Jerome Powell on Friday
said the central bank was prepared to tighten policy further if
appropriate.

Powell added that the risks of slowing the economy more than
necessary have become “more balanced”, reaffirming the central
bank’s intent to be cautious but also offering fresh optimism on
progress so far.

“Even though Powell tried to keep rate hikes on the table, I
don’t think he was very convincing. The markets didn’t buy it,”
Nordea’s Svendsen said.

Greek bonds outperformed after Fitch’s move, with the
ratings agency citing the sharp downward trend in general
government debt.

Fitch raised Greece’s sovereign rating to ‘BBB-‘ from ‘BB+’
with a stable outlook, making Greece’s bonds eligible for a wide
range of bond indexes that require investment grade ratings from
multiple agencies.

Its 10-year government bond yield dropped 12.5
bps to 3.564%, its lowest level since August 2022.

“This paves the way for Greece to rejoin the major sovereign
bond indices in January,” said Commerzbank rates strategist
Rainer Guntermann in a note.

Italy’s 10-year yield, the benchmark for the
euro zone’s periphery, fell 3 bps to 4.07%, its lowest level
since July 27.

The spread between the German and Italian 10-year yields
was at 175 basis points.
(Reporting by Samuel Indyk and Stefano Rebaudo; Editing by
Kirsten Donovan, Alison Williams and Emelia Sithole-Matarise)