Eurozone government bond yields could move higher as trading slows and worries about US banks ease

Eurozone government bond yields rose on Monday as tensions over US-China trade tensions and the health of US regional banks eased, slowing the recent flight to safe-haven assets, while Friday’s surprise credit downgrade for France barely made a difference.

Benchmark bund yields recorded their fourth consecutive weekly decline on Friday.

Market participants kept a close eye on Wall Street futures, which rose 0.3% at 1015 GMT after indexes closed higher on Friday. The European STOXX 600 last recorded a rise of 0.6%.
‘SHARES AND CREDIT STORY’

The German yield on ten-year Bunds rose by 1 basis point to 2.59%. They reached 2.523% on Friday, the lowest level since June 25. They ended the week 5.5 basis points lower.

“First of all, it’s an equity and a credit story,” said Mohit Kumar, chief economist and strategist for Europe at Jefferies, referring to last week’s market swings as investors reacted to signs of credit stress at U.S. regional lenders and worried about trade tensions. “Secondly, even in the bond market, it is an American story and not a European story. That is why bonds are not doing much,” said Kumar. little affected by Friday’s surprise news that S&P Global cut France’s rating a step further, warning that political instability would jeopardize the government’s efforts to repair its finances.

“Of course, France, we got the rating downgrade and we expected some action,” Kumar said. But he said such a cut is more important for slow-moving investors such as central banks and sovereign wealth funds, limiting the immediate price impact.

“It’s worth five to 10 basis points – the rating downgrade – but it’s not like we’re going to see everything on day one,” Kumar said. “It will be more a matter of investors buying less in the future rather than actively selling.”

MARKETS BETTING THAT THE ECB RATES WILL NOT CHANGE THIS MONTH

Elsewhere, money markets are expecting no change in the key interest rate at the next ECB meeting on October 30, and have priced in a rate cut of around 25 basis points by the end of July 2026.

The German two-year yield, which is more sensitive to expectations regarding the ECB’s policy rate outlook, rose by 2.4 basis points to 1.94%.

The yield gap between safe-haven Bunds and 10-year French government bonds – a market measure of the risk premium investors demand to hold French government bonds – widened to 79.36 basis points.

Yields reached 87.96 basis points earlier this month, the highest level since January 13, on concerns about France’s budget prospects, but fell below 75 basis points after Prime Minister Sebastien Lecornu survived two no-confidence votes in parliament on Thursday.