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2025-09-12 19:47:40
[Bond Yields Soar! ECB Rate Cut Expectations Ease, Fed Policy Path Diverges] ⑴ European government bond yields rose significantly this week, primarily driven by investors' downward revisions to their expectations for ECB rate cuts. Germany's 10-year government bond yield rose to 2.69%, up approximately 4 basis points this week. The interest rate-sensitive 2-year bond yield hit an April high of 2.0250%. Most of the gains occurred on Thursday, when the ECB, as expected, held interest rates steady and offered no indication of future policy direction. Institutional analysts point to the ECB's high confidence in the current policy rate level, suggesting support for the front end of the yield curve in the short term. ⑵ Market expectations for an ECB rate cut have cooled significantly, with money markets now pricing in a probability of less than 40% for a 25 basis point rate cut until June 2026, a significant drop from the nearly 50% level following Thursday's policy meeting. Meanwhile, the market is fully pricing in a 25 basis point rate cut from the Federal Reserve next week. This divergence in the policy paths of major central banks has caused the yield spread between 10-year German and US Treasury bonds to narrow to its lowest level since July 2023. (3) The difference in market pricing for Fed rate cuts and the ECB's policy is driving yield curve movements. The Fed's policy outlook, particularly the timing and pace of further rate cuts, will be a key focus for the market. Analysts note that while Powell is likely to reiterate that "every meeting is a living meeting," no specific October decisions have been made at the September meeting. (4) France's sovereign debt rating will face a review by rating agencies after the market close on Friday (Beijing time). While a downgrade may cause market concern, analysts believe that the review is unlikely to trigger a sharp market reaction, as some expectations have already been priced in. Currently, the yield spread between French and German 10-year government bonds remains at 77 basis points, down from the six-month high of 83.38 basis points reached this week.
