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(Updates at 1200 GMT)
By Harry Robertson
LONDON, Dec 27 (Reuters) –
Germany’s 10-year bond yield, the benchmark for the euro zone, fell to a one-year low on Wednesday as investors returned from vacation and raised bets on a steep interest rate cut next year.
The 10-year yield was last down 4 basis points (bps) at 1.921%, its lowest since Dec. 2022. Yields move inversely to prices.
Italy’s 10-year bond yield was last 6 bps lower at 3.488%, the lowest since Aug. 2022.
“What’s dominating the market right now is clearly the ongoing disinflation and the fact that the market is pricing in additional cuts,” said Emmanouil Karimalis, macro rates strategist at UBS. “This sentiment is bullish for bonds. “
Larger-than-expected declines in inflation in the United States and Europe, combined with a change in central bank tone, have led markets to price in a sharp fall in loan prices in 2024, following the rate hike cycle of the past two years.
On Wednesday, investors had expected the European Central Bank to cut interest rates across around 165 fundamental issues next year, from the existing record high of 4%, based on costs in derivatives markets. More or less 140 foundation issues are scheduled for December 15.
UBS’s Karim said the market could get ahead of the curve by pricing in a more than 70% chance of the ECB’s first rate cut coming in March, believing April would be more likely.
The gap between Italy’s and Germany’s 10-year yields was last at 155 bps, around its narrowest since June. The spread is seen as a gauge of investor confidence in the euro zone’s more indebted countries.
The bond market’s big rally has pushed riskier segments of the bond market further, with Italy’s 10-year yield on track for its biggest monthly drop since 2013, to 75 basis points.
Germany’s 2-year bond yield, sensitive to interest expectations, fell 1bp to 2. 403%, its lowest level since March. (Reporting via Harry Robertson; editing via Christina Fincher)