Eurozone yields spike as markets dial back ECB rate cut expectations
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Euro area government bond yields surged on Thursday as investors scaled back expectations for rate cuts by the European Central Bank. The sharp move followed President Trump’s surprise decision to temporarily pause and reduce most U.S. tariffs — a geopolitical shift that eased fears of a global recession and ignited a broad reassessment of monetary policy trajectories.
Germany’s 10-year yield, the eurozone benchmark, rose 9.5 basis points to 2.53%, reversing much of the previous session’s decline. The yield had touched a monthly low of 2.487% last Friday, driven by safe-haven demand as trade tensions escalated. The sharp rebound in yields reflects the market’s shifting view that downside risks to growth may moderate in the near term, making aggressive policy easing less likely.
In money markets, traders revised their outlook for the ECB’s deposit facility rate, pricing it at 1.82% by December — up from 1.65% on Wednesday. Notably, expectations for an April rate cut dropped from fully priced to roughly 90%, underscoring the speed of sentiment reversal following the White House’s move.
The positive mood extended to peripheral bonds. The yield spread between Italian and German 10-year debt tightened to 116 basis points, down from around 130 bps the day before, as Italian government bonds outperformed. Recent sessions had seen investors rotate heavily into German Bunds as global risks mounted, but Thursday’s repricing highlighted a renewed appetite for risk assets in Europe.
Still, caution remains. Holger Schmieding, chief economist at Berenberg, noted that “the risks remain huge,” citing unresolved trade tensions between the U.S. and China and the broader uncertainty surrounding negotiations with other global partners. While the tariff pause has brought temporary relief, the trajectory of monetary policy in the euro area will remain closely linked to developments on the geopolitical front.
Germany’s 10-year yield, the eurozone benchmark, rose 9.5 basis points to 2.53%, reversing much of the previous session’s decline. The yield had touched a monthly low of 2.487% last Friday, driven by safe-haven demand as trade tensions escalated. The sharp rebound in yields reflects the market’s shifting view that downside risks to growth may moderate in the near term, making aggressive policy easing less likely.
In money markets, traders revised their outlook for the ECB’s deposit facility rate, pricing it at 1.82% by December — up from 1.65% on Wednesday. Notably, expectations for an April rate cut dropped from fully priced to roughly 90%, underscoring the speed of sentiment reversal following the White House’s move.
The positive mood extended to peripheral bonds. The yield spread between Italian and German 10-year debt tightened to 116 basis points, down from around 130 bps the day before, as Italian government bonds outperformed. Recent sessions had seen investors rotate heavily into German Bunds as global risks mounted, but Thursday’s repricing highlighted a renewed appetite for risk assets in Europe.
Still, caution remains. Holger Schmieding, chief economist at Berenberg, noted that “the risks remain huge,” citing unresolved trade tensions between the U.S. and China and the broader uncertainty surrounding negotiations with other global partners. While the tariff pause has brought temporary relief, the trajectory of monetary policy in the euro area will remain closely linked to developments on the geopolitical front.