Euro Bond Yields Hold Firm, Diverging from US Markets on Fed Rate Cut Hopes.
A surprisingly weak U.S. jobs report has sent Treasury yields tumbling and fueled expectations of a Federal Reserve rate cut, while European Central Bank policy expectations remain unchanged.
Euro zone government bond yields remained stable on Monday, showing a stark contrast to their U.S. counterparts. This divergence comes after European bonds posted their largest weekly decline in two months, while a dismal U.S. jobs report has significantly increased bets on a Federal Reserve interest rate cut as early as September.
The Catalyst: Weak U.S. Employment Data
The primary driver behind the market shift was Friday’s monthly U.S. employment report. The data revealed that far fewer jobs were created in July than economists had forecast. Compounding the negative news, the figures for May and June were also drastically revised downwards.
This report prompted an immediate and rapid reassessment among traders, who now see a much higher probability of a September rate cut from the Fed. The political fallout was also swift, with reports of President Donald Trump sacking a top Labor Department official following the release.
Diverging Central Bank Outlooks
The key difference driving the two bond markets is the shifting outlook for their respective central banks. According to money market activity, traders are now pricing in two more rate cuts from the Federal Reserve this year. In contrast, markets currently expect the European Central Bank (ECB) to hold its rates steady for the foreseeable future.
This divergence has had a direct impact on the yield spread. The premium that 10-year U.S. Treasuries hold over benchmark 10-year German Bunds has narrowed to around 155.6 basis points, its tightest level since early April.
Market specifics:
German Bunds: The yield on the benchmark 10-year German Bund, a key indicator for the euro area, was up slightly by 1 basis point to 2.685% in early trading. This follows a significant 3.9 basis point drop last week.
U.S. Treasuries: In contrast, 10-year Treasury note yields were hovering near three-month lows at approximately 4.24%.
Other Euro Zone Bonds: Two-year German Schatz yields were flat at 1.911%. Meanwhile, bonds in Italy and France weakened slightly, with 10-year Italian BTP yields rising 2.6 bps to 3.559% and 10-year French OAT yields up 2.3 bps to 3.369%.
In summary, while the U.S. bond market is reacting strongly to signs of a slowing economy and the prospect of monetary easing, the Euro zone market is holding a steady course, reflecting a different set of economic conditions and central bank expectations.
