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BERLIN: Euro zone bond yields fell on Monday after President-elect Donald Trump picked Scott Bessent as Treasury secretary and as oil prices slipped on reports of a possible ceasefire in the war between Israel and Hezbollah.
The choice of Bessent caused US government bonds to rally and yields to drop, as markets expect the hedge fund manager to keep a leash on US deficits and deliver a moderate approach on tariffs. The fall helped pull European bond yields lower, although shorter-dated yields were little changed.
Concerns about new policies stoking inflation and reducing the room for the Federal Reserve to cut interest rates had caused US bond yields to rise in recent weeks.
Germany’s 10-year yield, the benchmark for the euro area, was last down 5 basis points at 2.2%, around the lowest in a month. Yields move inversely to prices.
“Bessent, a successful macro hedge fund manager, is associated with a preference to reduce the U. budget deficit to 3% of GDP, which clearly suggests less appetite for deficit spending,” said Jane Foley, head of FX strategy at Rabobank.
Also weighing on bond yields was a fall in oil prices, which declined as Israel and Lebanon said they were moving closer to a ceasefire.
Bond yields are sensitive to expectations about future inflation and central bank rates, which are heavily influenced by energy prices. Brent crude oil was last down 2.2% at US$73.54 a barrel.
On Friday, the euro area’s weak PMI data drove German 2-year yields and the euro to their lowest levels in around two years as investors positioned for deeper rate cuts from the European Central Bank (ECB).
Germany’s 2-year government bond yields – more sensitive to expectations for the ECB rates – was last down 1 bp at 2.004%, just above Friday’s two-year low, after falling 9.5 bps on Friday.
Markets priced in an ECB deposit facility rate at around 1.84% in July, compared with 1.8% late on Friday.
They fully discounted a 25 bps rate cut next month and an around 30% chance of a 50 bps move, compared with over 50% soon after the PMI data.
Philip Lane, the ECB’s chief economist, said there was still some way to go before euro zone inflation was sustainably back at 2%, but ECB policy should not remain restrictive for too long or price growth could fall below target.
German business morale fell more than expected in November, a survey showed, adding to the gloom around Europe’s biggest economy.
The gap between French and German yields– a gauge of the premium investors demand to hold France’s debt– widened to 83 bps, a fresh 3-1/2-month high, and was last at 81 bps. It hit 88 bps in early August, its widest level since July 2012.
The French risk premium has risen in recent days as Rassemblement National leader Marine Le Pen has threatened to try to bring down the government in a dispute over the budget.