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Euro zone yields edge lower
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French-German 10-yr spread steady after Moody's cuts
France's
outlook
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Selloff in US Treasuries continues; 10-yr yields hit fresh
high
(Updates at 1150 GMT)
By Medha Singh
Oct 28 (Reuters) - Euro zone government bond yields
hovered near recent highs on Monday at the start of a
data-packed week in the final run-up to the U.S. presidential
election on Nov. 5.
Yields on Germany's 10-year bonds, which move
inversely to prices, were 1 basis point (bp) lower at 2.278%
after hitting a more than three-month high earlier in the
session.
Growing bets on more European Central Bank interest rate
cuts have pressured euro zone bond yields this month after a
series of data pointed to further deterioration in the regional
economy.
While money markets are widely pricing in a 25 bp rate cut
at the ECB's December meeting, the probability of a larger 50 bp
reduction has risen to 47% from 20% a week ago.
Germany's two-year bond yield, which is more
sensitive to euro zone rate expectations, fell 2 bps to 2.123%.
A spate of economic data this week includes the euro zone
third-quarter GDP report and inflation readings before the main
U.S. employment report on Friday, all of which could shape the
rate path on both sides of the Atlantic.
"I see chances for markets in the euro area stabilising
ahead of inflation numbers this week, where headline numbers
will still be below 2% so it would be a benign data point and
markets could profit off of that," said Hauke Siemssen, rates
strategist at Commerzbank.
Some ECB policymakers have expressed concern about inflation
falling below 2% and forcing the central bank to act quickly.
However, Belgian central bank chief Pierre Wunsch on Monday
joined other colleagues in pushing back on more dovish views,
saying there is no urgency for the ECB to cut interest rates
faster.
"The bar is very high for a 50 bp cut. Markets speculating
about cuts larger than 25 bps are fairly ambitious and I don't
think it will ultimately happen," Siemssen said.
In contrast, bets on a less dovish U.S. Federal Reserve
after strong economic data this month have fuelled a rise in
U.S. Treasury yields.
U.S. benchmark 10-year bond yields rose 2 bps to
4.256% to stand just under their late-July highs.
With just over a week until the U.S. presidential election,
markets are also increasingly pricing in the likelihood that
Republican Donald Trump will return to the White House, along
with a Republican majority in the Senate and House of
Representatives.
Trump's potential policies, including those on tariffs, are
seen as inflationary and have boosted the dollar and fuelled a
rise in Treasury yields.
MOODY'S DOWNGRADES FRANCE'S OUTLOOK
The gap between French and German 10-year yields
- a gauge of the risk premium that investors
demand to hold France's government bonds - tightened 1.45 bps to
73.95 bps.
Ratings agency Moody's revised France's outlook to
"negative" from "stable" late on Friday.
The agency cited mounting uncertainty that the country would
be able to curb its widening budget deficit, but maintained its
Aa2 rating on French debt.
The downward revision of the outlook underlines growing
international concerns about the country's public finances, and
comes as a belt-tightening 2025 budget bill is being discussed
in parliament.
"The structural problems are not going away anytime soon.
Unless France is downgraded to single A, it's probably not going
to have a larger impact. Rating risks are rather muted for now,"
Siemssen said.
Italy's 10-year government bond yield was almost
1 bp lower at 3.499%, with the gap between Italian and German
yields at 121.65 bps.