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2025-12-09 19:17:03
[Hike Expectations Overdone? Eurozone Bond Market Pauses, Focus on Fed Signals] ⑴ Eurozone bond yields edged lower on Tuesday as investors took a breather after a sharp repricing on Monday, with the market having almost ruled out a rate cut by the European Central Bank (ECB) in 2026 and pricing in a rate hike in March 2027 with a probability exceeding 50%. ⑵ A batch of strong economic data and hawkish comments from ECB Executive Board member Schnabel (stating a rate hike was more likely than a cut) pushed eurozone 10-year borrowing costs to a multi-month high on Monday, while German 30-year bond yields rose to a more than 14-year high. ⑶ Citigroup's European interest rate strategist noted that the main driver of the recent bond market sell-off was the increased premium expected by the market for an ECB rate hike, also mentioning the impact of economic data, spillover effects from Fed expectations, and Schnabel's comments. ⑷ The strategist added that they do not expect the market to go too far in building an ECB rate hike premium and reiterated Citigroup's view that the central bank will keep key interest rates at 2% for several years. (5) Latest pricing in the money market shows that the market sees about a 5% probability of a rate cut by the European Central Bank next summer, and about a 50% probability of a rate hike by March 2027, down from 60% earlier in the day. (6) Rabobank strategists point out that factors driving up borrowing costs in the Eurozone also include market concerns that the Federal Reserve may send some hawkish guidance this week while anticipating a rate cut. (7) The strategist believes that assuming no new shocks to economic growth in the coming months, the market may become increasingly focused on the risk of a rate hike by the end of next year. (8) The market currently widely expects the Federal Reserve to cut rates by 25 basis points at the end of Wednesday's meeting, but the focus will be entirely on any signals it sends regarding the future path; traders are currently pricing in three more rate cuts by the end of 2026. (9) The yield on German 30-year bonds, which is more sensitive to long-term fiscal concerns, fell 2 basis points to 3.45%, while the yield on German 2-year bonds rose slightly by 1 basis point to 2.15%.
