LONDON: Euro zone bond yields were little changed on Monday and traded at around their highest since mid-November as investors face an uncertain monetary policy and borrowing outlook for 2025.
Germany's 10-year bond yield, the benchmark for the euro zone, rose 1 basis point (bps) to 2.399 per cent, around its highest in six weeks. Yields move inversely to prices.
Yields rose on Friday, reflecting a move higher in the US, where a strong economy has limited the amount the Federal Reserve is expected to cut rates next year. US Treasury yields set the tone for borrowing costs around the world.
The euro zone economy has also shown some minor signs of improvement. The decline in euro zone business activity eased this month as the bloc's dominant services industry bounced back to growth, survey data showed on December 16.
"Real rates are rising primarily for macro reasons," said Florian Ielpo, head of macro at Lombard Odier Investment Managers, referencing bond yields adjusted for inflation.
"The improvement in current economic conditions - notably in China and Europe, against a backdrop of improving US industrial surveys - has led to a revision of central bank rate cut expectations." He added: "The market now only expects 1.5 rate cuts in the United States in 2025, suggesting a scenario of strong growth and renewed inflationary pressures." Italy's 10-year yield was flat at 3.536 per cent, and the gap between Italian and German bond yields stood at 113 bps.
Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was little changed at 2.104 per cent, around its highest since November 22.
Elections in Germany in February will be a focal point early next year for investors, who are wondering whether a new government will allow higher public borrowing to prop up the flagging economy.
Yield curves have steepened this year - longer-dated yields have risen more than shorter-dated ones - as economies have been relatively resilient but cooling inflation has allowed central banks to cut rates.
Germany's 10-year bond yield has risen around 37 bps in 2024 but the 2-year yield has fallen around 30 bps.
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