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Euro area yields drop after Trump wins US elections

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Investors fear US tariffs could hurt European economy

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Markets price in more ECB easing by June 2025

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German yield curve at its steepest in over 2 years

By Stefano Rebaudo and Harry Robertson

Nov 6 (Reuters) - Euro area short-dated government bond

yields plunged as markets priced in more rate cuts by June 2025

on Wednesday after Donald Trump's victory in the U.S.

presidential election, which could hurt Europe's economy and

lead to deeper interest rate cuts.

Fresh tariffs could be detrimental to global growth and lead

to retaliation and a vicious circle of trade war, European

Central Bank Vice President Luis de Guindos said on Wednesday.

Money markets increased their bets on the ECB monetary

easing path, pricing in a depo rate as low as 2% in June 2025 -

which implies a 25 basis points (bps) cut at each meeting - on

Wednesday from 2.18% late Tuesday.

They also fully priced in a 25 bps rate cut in December

and an around 20% chance of a 50 bps move,

in line with the levels seen the day before.

"We already expect policy divergence between the Federal

Reserve and ECB," said Andrzej Szczepaniak, economist at Nomura,

referring to the ECB cutting rates more quickly than the Federal

Reserve. "However, a Trump victory only amplifies this."

"ECB speak has suggested the ECB will not react immediately,

and this is likely the case," he added.

Germany's 2-year government bond yields, more

dependent on the policy rate outlook, dropped 12 bps - in their

biggest daily fall since early August - to 2.21%.

The euro area's benchmark Bund yield fell 2.5

bps to 2.41%, leading the gap between 10-year and 2-year yields

to 21.80 bps, its highest level since Nov. 3, 2022.

"The fact that European rates have reacted sharply might be

a little bit overdone in my view because we don't expect the ECB

to shift their expectations quickly," said Emmanouil Karimalis,

macro rates strategist at UBS.

The curve inverted in mid-November 2022, as the ECB started

aggressive monetary tightening with 200 bps rate hikes between

July and November, triggering recession concerns.

An inverted curve suggests investors are pessimistic about

the long-term economic outlook and see lower policy rates.

Markets are willing to price in some term premium -- the

additional yield investors demand for holding long-term bonds --

as they already priced the monetary easing path.

"In the medium-term, Trump's return may accelerate the

fragmentation of the global economy, which is likely to hurt the

globalized EU economy disproportionately," Citi economists said

in a research note.

"This could strengthen the case for more European cohesion,

joining forces to secure access to resources and defend its

security, along the lines of the (Mario) Draghi report."

The former ECB chief Mario Draghi said in early September

the bloc needed investment of 750-800 billion euros per year, up

to 5% of GDP.

Bund yields dropped slightly while the benchmark 10-year

Treasury yield rose as much as 18 basis points to

4.471% as investors worried a possible Republican sweep of

Congress and the White House could stoke inflation and weaken

U.S. public finances.