Euro zone bond yields fall as recovery from gilt sell-off continues, tariff deadline looms

Mint

a day ago

(Corrects date in paragraph 1 to July 9, not April 9)
LONDON, July 4 (Reuters) - Euro zone bond yields were lower on Friday as the recovery in the bloc's bond markets continued following the gilt-induced sell-off on Wednesday, while focus was turning to U.S. President Donald Trump's July 9 tariff deadline.
Germany's 10-year benchmark bund yield was down 3 basis points (bps) at 2.549%, having risen to an almost six-week high on Wednesday of 2.632% when Britain's gilt yields jumped due to renewed fiscal sustainability concerns. Bond yields move inversely with prices.
Britain's 10-year gilt yield was down 1 bp on Friday at 4.539%, having risen as high as 4.681% on Wednesday.
Wednesday's sharp collapse in British government bond prices was sparked by a U-turn on cuts to welfare spending and a tearful appearance by finance minister Rachel Reeves in parliament.
Euro zone bonds had slipped in tandem with their British counterparts, led by those countries with their own shaky public finances, such as France and Italy. Those bond markets were also recovering on Friday.
France's 10-year yield was down 2 bps at 3.258% while Italy's was down 2.5 bps at 3.456%.
The spread between Italian and German 10-year yields stood at about 90 bps.
Markets were turning their attention to next week's tariff deadline, with the 90-day pause that Trump activated following the market chaos unleashed in April set to expire on July 9.
Germany's 10-year bund yield had its lowest monthly trading range since 2021 in June, Commerzbank said earlier this week, as calm returned to markets during the tariff pause.
"The market is waiting to see what happens with the tariffs in the United States," Birgit Henseler, senior analyst at DZ Bank, said.
Henseler added that there could be increased volatility in the next week as details emerge about Trump's plan for import tariffs with the United States' major trading partners.
Focus this week has also been on the European Central Bank's annual forum in Sintra, Portugal, with policymakers strongly hinting at a pause to the rate cutting cycle later this month after 200 bps of easing in just over a year.
Futures are pricing in just 1.5 bps of ECB easing in July, implying about a 5% chance of a rate cut. By December, markets are pricing in about 28 bps of easing, implying just one more rate-cut by the end of the year.
"Absent a catalyst like a further escalation in the trade war ... a sharp front-end repricing is unlikely," Barclays rates strategist Rohan Khanna said in a note.
Germany's two-year yield, which is sensitive to changes in European Central Bank policy expectations, was last down 3 bps at 1.809%, but remained well within its recent narrow range. (Reporting by Samuel Indyk; Editing by Alexandra Hudson and Andrew Heavens)