Interest rates in the eurozone are falling; The advantage of Bunds over Treasuries is decreasing

German government bond yields fell slightly in early trading on Monday, but were still close to the smallest discount to government bond yields in a month, after a top Federal Reserve official indicated a rate cut may be planned in December, boosting US government bond prices late last week. New York Fed President John Williams said Friday that rates “could fall in the near term,” prompting traders to quickly price in the possibility of a decline in December, sending Treasury yields to a three-week low.The benchmark 10-year Treasury yield, which ended last week not far from a six-week high, fell 1 basis point to 2.688% in early trading on Monday, pushing the Treasury discount to 136.4 basis points, near the lowest since late October.

This gap was closer to 156 basis points just three months ago, but has narrowed as investors have priced in only a small chance that the European Central Bank will cut rates again in the next 12 months, and a growing possibility that the Fed will cut rates repeatedly in 2026.

The smaller discount reflects the 20bp decline in government bond yields since the end of August, while Bund yields have barely budged.

The renewed prospect of a series of Fed rate cuts fueled optimism in risky assets like stocks on Monday, which in theory would draw capital away from safe havens like bonds. On monetary policy in the euro zone, ECB officials Madis Muller and Martin Kocher told a panel discussion on Friday that the central bank expects inflation to remain around the 2% target for now, while still calling for vigilance.

“While the ECB remains on hold, we believe that the macro outlook, while weak, has not deteriorated sufficiently to warrant a change in its communications or policy stance. The minutes should provide an updated perspective on how the Governing Council views the balance of risks around the economic outlook,” Jefferies economists said in a note. A survey of German business confidence will be released later this morning on Monday. The Ifo Institute’s monthly business climate index is expected to rise to 88.5 this month from 88.4 in October.