Euro zone government bond yields were mixed on Monday as money markets increased their bets on a large 50 basis point rate cut by the Federal Reserve on Wednesday.
The Bank of England and the Bank of Japan will also hold their monetary policy meetings later this week and are expected to keep rates at current levels.
Money markets have fully priced in 25 basis points of rate cuts and a 59 percent chance of a 50 basis point move, up from around 50 percent late last week, according to the CME FedWatch tool.
“A rate cut of more than 25 basis points seems unlikely: even if the Fed delays cutting rates, a larger move could be taken as a sign of panic,” said Paul Donovan, chief economist at UBS Global Wealth Management.
“More likely to be more frequent cuts rather than broader cuts,” he added.
The yield on German 10-year bonds, the benchmark for the eurozone bloc, rose one basis point (bp) to 2.16 percent.
Citi cited Fed Governor Christopher Waller as saying he was keeping an open mind about the size and pace of rate cuts after data showed U.S. employment rose less than expected in August.
“These comments suggest the Fed wants to start with small cuts, but retain the option to take larger steps later,” said Jabaz Mathai, head of G10 FX and rates strategy at Citi. “The timing of the election would also justify a conservative start.”
Investors will be focused on remarks from Federal Reserve Chairman Jerome Powell regardless of what the Fed decides on rates.
“The Fed’s decision is likely to be “shrouded in a dovish tone at the press conference,” Citi’s Mathai added. “The desired outcome would be to ease financial conditions, or at least not tighten them.”
Markets have priced in a 37 basis point rate cut by the European Central Bank by year-end, implying a 25 basis point move and a roughly 50 percent chance of a second cut.
The yield on Italian 10-year bonds fell 0.5 basis points to 3.51 percent, and the gap between German and Italian bonds (a gauge of the risk premium investors demand to hold Italian government bonds) stood at 135 basis points.
Investors are closely watching political developments in Italy and France, as the European Union has placed both countries under a so-called Excessive Deficit Procedure this year.
Italy plans to confirm its commitment to reduce its deficit to zero. GDP a proportion lower than the 3 percent limit that the EU has set for 2026 in its medium-term structural budget plan to be presented in mid-September.
France’s deteriorating public finances will be a major challenge for new Prime Minister Michel Barnier, who faces tough choices such as cutting spending, raising taxes or losing credibility with EU partners and financial markets.
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