Market bets on the European Central Bank accelerating rate cuts, German government bond yield curve shows an inverted trend
The market expects the European Central Bank to accelerate rate cuts to address economic slowdown, with the German government bond yield curve returning to normal. The two-year bond yield is lower than the ten-year bond yield for the first time, and the spread has turned positive for the first time since November 2022. Signs of economic recession in the Eurozone are evident, with contraction in private sector activity. The German central bank has indicated that it may have entered a mild recession. The market expects the European Central Bank to cut rates by 43 basis points before the end of the year. French government bond yields are under pressure, with CDS spreads rising to 80 basis points, reflecting investors' concerns about France's fiscal challenges
According to the Zhitong Finance and Economics APP, as market participants expect the European Central Bank to accelerate interest rate cuts to address concerns about slowing economic growth, key parts of the German government bond yield curve have returned to normal. On Monday, the yield on two-year German government bonds fell below the yield on ten-year government bonds, leading to the first positive spread between the two since November 2022. Previously, the Federal Reserve and the Bank of England have also adopted loose monetary policies, and similar phenomena have appeared in the US and UK markets.
This round of yield repricing comes against the backdrop of increasingly clear signs of economic recession in the Eurozone. The latest data shows that private sector activity in the Eurozone has contracted for the first time since March. The German central bank stated last week that Germany may have entered a mild recession.
Over the past two years, due to expectations that the European Central Bank would maintain a tight monetary policy, the German government bond yield curve has exhibited an inverted yield curve, with short-term yields higher than long-term yields. This has prompted investors to buy longer-term bonds, overturning the traditional upward-sloping yield curve.
However, with Eurozone inflation hovering at a three-year low slightly above the central bank's target, the Federal Reserve has initiated a loose cycle, cutting interest rates by 50 basis points. Market expectations for further easing by the European Central Bank have also increased. The swap market currently expects the European Central Bank to cut rates by an additional 43 basis points before the end of the year, up from 38 basis points last week.
This month, the yield on two-year German government bonds has fallen by 25 basis points to 2.14%, while the yield on 10-year government bonds has fallen by 15 basis points to 2.15% during the same period.
It is worth noting that the spread between the benchmark bond yields of France and Germany has climbed to its highest level since early August, reflecting investors' nervousness about the political and fiscal challenges facing France.
The credit default swap (CDS) spread, a key risk indicator for France, has risen to 80 basis points, the largest increase since August 5. Since French President Emmanuel Macron unexpectedly announced early elections in June, concerns about France's ability to control its massive deficit in the long term have intensified