Euro zone benchmark German bond yields were on track on Friday for their biggest weekly decline since mid-April as investors focused on the long-term adverse economic impact of U.S. trade policy.
Germany’s 10-year government bond yield was set for a 5-basis-point weekly drop, particularly after falling on Thursday on risks of extended policy and economic paralysis.
On Friday, by 1457 GMT, it was up 1 bp to 2.52% after hitting a three-week low at 2.497% in earlier trade.
A U.S. appeals court reinstated U.S. President Donald Trump’s tariffs on Thursday, leaving Wall Street with no clear direction a day after most of the tariffs were blocked by a trade court.
Markets were largely unmoved by German inflation data showing price growth easing further in May closer to the European Central Bank’s 2% target, though it was higher than analysts expected.
And euro zone bank lending continued to rebound last month, likely reflecting lower interest rates, separate data showed on Friday.
Focus was also on data showing U.S. consumer spending increasing marginally in April while the Fed’s favoured measure of underlying price pressures posted its smallest annual increase in four years.
“U.S. data may play a more instrumental role for euro rates than domestic data, given that a hit to global risk sentiment can bull flatten the euro curve,” said Michiel Tukker, senior European rates strategist at ING.
“Yet with 10-year Bunds trading around the level of swaps, markets are already positioned for more headwinds and uncertainty ahead,” he added.
The gap between interest rate swaps and Bund yields was at minus 2.4 bps on Friday. It hit its all-time low at around -16 bps in early March. It was around 25 bps in October 2024, before a German political crisis.
Markets price in more than a 90% chance of a 25 bps ECB rate cut next week. They also indicated a deposit facility rate at 1.70% in December, implying two rate cuts and just under a 20% chance of a third easing move by then.
The ECB will almost certainly cut interest rates on June 5, with a more than 70% majority of economists polled by Reuters expecting policymakers to pause for the first time in a year in July despite a weak economy at risk from the U.S.-led trade war.
Italy’s 10-year yield was last up 2 bps to 3.52%, after dropping to 3.488%, its lowest level in nearly 3 months. It was on track for a weekly drop of 11 bps, the most since mid-April.
The gap between Italian and German yields was at 97 bps after reaching 89.8 bps on Thursday, its lowest since February 2021.