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[US and European Central Banks Completely Diverge, German Bond Yields Surge to Nine-Month High] ⑴ German government bond yields rose further on Friday, nearing a nine-month high, with the 10-year yield climbing to 2.17%, a gain of about 6 basis points this week, reflecting that the market has begun pricing in the possibility of future interest rate hikes in the Eurozone. ⑵ This contrasts sharply with the US market, where the Federal Reserve is expected to cut rates next year. This divergence in monetary policy expectations has narrowed the yield spread between US and German 2-year government bonds to 135.34 basis points, the smallest since May 2023. ⑶ The immediate catalyst for the rising yields was comments this week from influential European Central Bank policymaker Isabelle Schnabel, who hinted that the next step in interest rate action could be a rate hike, although some institutions believe this signal is premature and unlikely to gain widespread support within the Governing Council. ⑷ Money market pricing indicates that traders have completely ruled out the possibility of an ECB rate cut in 2026 and expect a rate hike by March 2027 to be around 58%. (5) Deutsche Bank forecasts the ECB's final policy rate to be 2%, with its baseline scenario being the next rate hike in mid-2027, triggered by a shift in inflation risks driven by a combination of fiscal easing and a tight labor market. (6) Despite expectations of rate hikes, some institutions see value in German bonds. UBS strategists recommend going long on German government bonds, arguing that their term premium is too high given Germany's long-term growth and inflation prospects. Other analysts believe the US-German interest rate differential offers investors an opportunity to capitalize on this difference. (7) The market will closely watch next week's intensive central bank decisions and the delayed US employment data to confirm or correct the current trading logic of the divergence between US and European monetary policies.