Euro Zone bonds rally on ECB rate cut expectations amid Middle East tensions
| Image:Republic
Euro Zone bond rally: Euro zone government bond yields plummeted on Friday as market speculation intensified regarding future rate cuts by the European Central Bank (ECB). Simultaneously, concerns over an escalation in the Middle East conflict drove investors towards safe-haven assets.
The ECB’s announcement on Thursday hinted at potential rate cuts in the near future. Initially, this failed to significantly impact market expectations due to robust US economic data, which tempered anticipations for monetary easing in the US.
However, by Friday, money markets had significantly increased their expectations of rate cuts by the ECB, with forecasts suggesting over 85 basis points by year-end. Additionally, there was a nearly 90 per cent likelihood of a 25-basis-point cut by June.
The escalating tensions in the Middle East also contributed to market jitters, leading to a surge in gold prices to a new high as investors sought safe-haven assets.
Market analysts noted that investors were closing short positions on euro area government bonds that were initiated during a period of strong U.S. data and hawkish comments from Federal Reserve officials. This move was in response to mounting fears of a conflict between Iran, Israel, and the US, which weighed on market sentiment.
Joost van Leenders, Senior Investment Strategist at Van Lanschot Kempen, remarked, “We do see geopolitical risks impacting markets a bit more than usual, with investors closely watching developments in Israel and Iran.”
Israeli Defence Minister Yoav Gallant’s statement on Thursday, indicating Israel’s intention to retaliate directly to any Iranian attack, further heightened tensions. The Pentagon also reaffirmed the US’s commitment to Israel’s security against threats from Iran and its allies.
The decline in bond yields on Friday was primarily attributed to investors closing short positions opened after strong US economic data, according to Massimiliano Maxia, Senior Fixed Income Specialist at Allianz Global Investors.
In response to these market movements, Germany’s two-year government bond yield fell by 12 basis points to 2.84 per cent, reaching a one-week low. Similarly, the benchmark 10-year Bund yield dropped to its lowest level in over a week, down 13.7 basis points at 2.33 per cent.
Meanwhile, the Italian 10-year bond yield was 14 basis points lower at 3.72 per cent. The spread between Italian and German 10-year borrowing costs, a key indicator of risk perception, stood at 137 basis points.
The ECB’s policy meeting on Thursday, while confirming its data-driven approach, was relatively uneventful for the markets.
(with Reuters inputs)
