- Eurozone government bond yields slightly rebounded on Thursday, but overall remained near this week's lows, indicating that while investors have not completely shifted to dovish trades, they have begun to lower their bets on further ECB rate hikes this year.
- Lagarde's latest remarks emphasized that with oil prices falling, the risks to inflation and growth in the Eurozone are more balanced than a few weeks ago. Consequently, the market has revised down the probability of another rate hike this year from nearly 100% to about 87%.
- In contrast to the cooling expectations for the ECB, the Federal Reserve's hawkish stance remains clear. The yield spread between German and U.S. two-year bonds has widened to 165 basis points, close to its highest level since last September, indicating that the policy divergence in the global bond market is deepening.
Lagarde's Remarks Lower Tightening Expectations
Lagarde did not issue new hawkish signals but emphasized a more balanced risk distribution following the decline in oil prices. Traders interpreted this wording as the ECB not being in a hurry to continue raising rates. Although short-term German bond yields rebounded, they remain near their recent lows.
Cautious Trend in German Bonds
The latest yield on Germany's two-year government bonds is reported at 2.529%, and the 10-year yield at 2.94%, both showing only moderate increases. This reaction in the bond market suggests that the market is more likely adjusting positions ahead of the non-farm payroll data release rather than betting on a renewed warming of the European economy.
Fed's Stance Drives Widening Yield Spread
Walsh's insistence on maintaining the 2% inflation target has reinforced expectations that U.S. interest rates will remain high for a longer period. As a result, the yield spread between German and U.S. two-year bonds continues to widen, becoming a key driver of recent currency and bond market volatility.
Non-Farm Data as a Short-Term Pricing Key
The upcoming U.S. June non-farm employment report will directly influence the relative expectations of the two major central banks. If employment continues to slow, the yield spread may temporarily converge; if the data is robust, the policy divergence trade between Europe and the U.S. may continue.
