Euro zone government bond yields increased significantly as markets adjusted their expectations regarding potential rate cuts from the European Central Bank (ECB). This shift came after the U.S. administration’s decision to temporarily lower tariffs, thereby encouraging countries to engage in negotiations. President Donald Trump’s move alleviated immediate worries about a possible recession in the U.S. and a wider slowdown in the global economy. However, despite the temporary easing of tensions, Trump expressed intentions to increase tariffs on Chinese imports to 125%, raising concerns about the ongoing trade tensions.
While global stock markets initially surged, the momentum waned as apprehensions about a protracted trade war between the U.S. and China grew. In the euro zone, Germany’s 2-year bond yield surged by 17 basis points to 1.89%, marking its largest daily increase since early March. Meanwhile, money market data revealed that expectations for the ECB deposit facility rate in December had risen to 1.78%, compared to 1.65% just days prior. Notably, the likelihood of a rate cut in April fell dramatically, as markets adjusted their forecasts based on the new geopolitical landscape.
Analysts cautioned that while the U.S. administration’s decision may be beneficial in the short term, it also introduces prolonged uncertainty that could affect corporate investment and economic growth. Holger Schmieding, chief economist at Berenberg, highlighted the risks involved in the ongoing trade conflict, noting that uncertainty over tariffs will likely force companies to postpone important investment decisions. In addition, Germany’s 10-year bond yield rose to 2.69%, while the yield spread between Italian and German 10-year bonds narrowed, suggesting a temporary outperformance of Italian bonds. Aman Bansal from Citi mentioned that the current support for risk assets might be short-lived due to ongoing uncertainties in the trade environment.