- Christine Lagarde, President of the European Central Bank (ECB), stated in the European Parliament on Monday that there are no signs of inflation rebounding to a level that would require stronger policy measures, and business activity data also shows moderate inflation indicators.
- Germany's 10-year government bond yield remained near an 11-week low on Wednesday, slightly falling to 2.91% during the day, marking the lowest level since early April this year, with a cumulative decline of nearly 8 basis points this week.
- The derivatives market expects the ECB to raise interest rates by only 25 basis points this year, while hawkish expectations for the Federal Reserve (Fed) have pushed the U.S. 10-year government bond yield up to 4.48%, widening the U.S.-German 10-year bond yield spread to 157 basis points.
Eurozone Bond Yields Hit Multi-Week Lows
Eurozone benchmark borrowing costs remained under pressure on Wednesday. The yield on Germany's 10-year government bond, a benchmark for eurozone pricing, was last reported at 2.91%, staying near its lowest point since early April. Investors' expectations for the ECB's future rate hike potential have further narrowed, mainly supported by controlled inflation prospects and moderate economic activity indicators. The short-term bond market also remained stable, with Germany's 2-year government bond yield flat at 2.50%, while the long-term 30-year government bond yield fell nearly 2 basis points to 3.46%, also hitting multi-week lows.
Lagarde Hints at Limited Policy Tightening
The downward trend in eurozone bond yields was reinforced after Lagarde's testimony to the European Parliament on Monday. In her speech, Lagarde emphasized that there are currently no signs of inflation in the eurozone posing a risk of rebound that would require stronger monetary policy measures. Combined with recently released PMI and other business activity data, core price inflation indicators within the region remain stable, limiting the necessity for further aggressive monetary policy tightening. Although the ECB took rate hike actions this month, current swap market pricing shows that traders expect only one 25 basis point rate hike this year, and the likelihood of further rate increases in 2026 has significantly decreased.
U.S.-German Yield Spread Widens to New High Since 2025
Meanwhile, across the Atlantic, the policy path of the Federal Reserve shows a clear divergence from that of the ECB. Influenced by strong macroeconomic data, traders have turned more hawkish in their expectations for the Fed, pushing the U.S. 10-year government bond yield up to 4.48%. This divergence has widened the U.S.-German 10-year bond yield spread to about 157 basis points, the largest spread since August 2025. This widening spread may exert continued downward pressure on the euro against the dollar.
Market Outlook and Variable Assessment
Looking ahead, the pricing logic of the eurozone bond market will continue to seek a balance between slowing economic growth and controlled inflation. If future eurozone core inflation data shows an unexpected rebound, the market may face the risk of reassessing the ECB's rate pricing. Conversely, if eurozone business activity further weakens, it may prompt the market to bet on the arrival of a rate-cutting cycle earlier, thereby pushing yields further down.
