Euro area yields mixed, Iran-Israel ceasefire and fiscal outlook in focus

Zawya

5 hours ago

Euro area government bond yields were mixed on Wednesday as investors weighed expectations that the Iran-Israel ceasefire would hold alongside concerns about increased fiscal spending across the euro area.
Germany's cabinet approved a draft budget with record investments on Tuesday.
Meanwhile, NATO leaders were set to sign up a big increase in defence spending, with U.S. President Donald Trump striking a reassuring tone on his commitment to protecting fellow members of the alliance.
German 10-year government bond yields, which serve as the benchmark for the wider euro zone, rose 0.5 basis points (bps) to 2.54%.
Yields on 30-year German bonds were up one bp at 3.05%. They climbed 5 bps on Tuesday, after hitting 3.081%, their highest level in almost a month.
Analysts expect rising bond supply across the euro area from more fiscal spending to drive long-term yields higher.
Closely watched oil prices held near multi-week lows on the prospect that crude flows would not be disrupted, after a ceasefire between Iran and Israel.
"Financial markets have priced in an Iran-Israel ceasefire holding," said Paul Donovan, chief economist at UBS Global Wealth Management.
However, intelligence reports suggesting the U.S. failed to destroy Iran's nuclear program will probably keep tensions high in the region, he added.
Trump said that the intelligence following the strikes on Iranian nuclear sites was inconclusive, but also suggested the damage could have been severe.
Analysts argued that a spike in energy prices could lead markets to scale back their bets on central bank rate cuts.
Money markets priced in a European Central Bank deposit facility rate at 1.75% in December, a level seen before the Israeli attack against Iran on June 13, after a rise up to 1.80% on Monday.
A key market gauge of euro area long-term inflation expectations was last 2.12% from 2.08% on June 12.
Benchmark 10-year Treasury yields were flat at 4.29% in London trade after dropping on Tuesday.
Deutsche Bank flagged that since Thursday the market has priced roughly 10 bps more Fed rate cuts by year-end on the heels of dovish comments from Governors Christopher Waller and Michelle Bowman and Fed Chair Jerome Powell's testimony.
A decline in risk appetite recently widened the yield spreads between government bonds of highly indebted countries and safe-haven German Bunds, before risk sentiment improved and spreads narrowed again on Tuesday.
The Italian yield gap versus Bunds — a market gauge of the risk premium investors demand to hold Italian debt — was at 95 bps. It widened up to 104 bps last week, while being below 90 bps on June 12.
Italy's 10-year yields rose 0.5 bps to 3.49%.
The French gap versus Bunds was at 69 bps after reaching 75 bps last week. It was at 65 bps in early June.
(Reporting by Stefano Rebaudo; Editing by Rachna Uppal, Bernadette Baum, Philippa Fletcher)