Euro zone yields mixed, US data in focus as ECB pricing is stuck

By Stefano Rebaudo

Euro zone government bond yields were mixed on Monday after a two-week climb, as investors awaited key U.S. data and tracked trade developments following last week's talks between the U.S. and China.

Euro area borrowing costs recorded two straight weekly rises on Friday after signs of a hawkish tilt from the Federal Reserve and an uneventful European Central Bank policy meeting.

Data from the U.S. manufacturing ISM, due later in the session, will receive more attention than usual as the shutdown is still underway.

Germany’s 10-year yields (DE10YT=RR), the euro area‘s benchmark, were flat at 2.64%. They hit 2.661% last Thursday, their highest since October 10.

"ECB pricing looks stuck once again, cemented by the U.S.-China trade truce," Citi said in its morning note.

"While the October (ECB) meeting offered little hope of any action anytime soon, there is still a possibility that the December consumer price index (HICP) projections could allow worries of a long-lasting undershoot to resurface, reigniting some debate about cutting to better protect the inflation target."

Traders increased bets on rate cuts last month amid mounting concerns over the economic fallout from differences on trade between the United States and China.

Stronger-than-expected data last month supported a repricing of ECB rate expectations, after trade tensions eased.

"Any lingering hope for the ECB’s doves to make their case for a December cut have been dashed by the preliminary October PMI prints," said Bob Savage, head of markets macro strategy at BNY.

Money markets priced in an about 50% chance of a 25-basis-point ECB rate cut by September (EURESTECBM8X9=ICAP) from over 80% in mid-October at the height of trade tensions. The key rate is seen at 1.90% in December 2026 (EURESTECBM10X11=ICAP) from the current 2%.

The ECB should not try to fine-tune its policy because adjusting for minor deviations could itself cause market volatility, ECB policymaker Peter Kazimir said on Monday.

The U.S. Supreme Court on November 5 will hear arguments on whether U.S. President Donald Trump overstepped his authority in imposing most of his tariffs under a 1977 law known as the International Emergency Economic Powers Act.

Germany’s 2-year yields (DE2YT=RR), more sensitive to expectations for ECB policy rate outlook, were roughly unchanged at 1.99%.

The yield gap between safe-haven Bunds and 10-year French government bonds (DE10FR10=RR) — a market gauge of the risk premium investors demand to hold French debt — was at 79.50. The spread hit 87.96 bps in early October, the widest since January, driven by investor concerns over France’s fiscal trajectory.

French lawmakers on Friday shot down proposals to levy a wealth tax on the ultra-rich, demanded by the Left, during the debate over Prime Minister Sébastien Lecornu’s belt-tightening budget.

Italy's 10-year government bond yields IT10Y dropped 0.5 bps to 3.38%, with their gap with Bunds (DE10IT10=RR) at 74 bps.