Euro zone bond yields rise after ECB delivers ‘hawkish’ cut

Euro zone government bond yields extended gains Thursday afternoon, shortly after the European Central Bank announced its first interest rate cut in five years.

Germany’s 10-year bond yield, seen as the euro area benchmark, was up 6 basis points to 2.557% at 3:12 p.m. London time. The country’s 2-year bond yield was higher by 4 basis points to 3.025%.

Italy’s 10-year bond yield was up 7 basis points to 3.88%, while the yield of the Spanish bond of the same maturity added 6 basis points to 3.29%.

While the ECB delivered a first rate since 2019, market watchers were quick to speak of uncertainty over what happens next.

“The Governing Council emphasized a data-dependent, meeting-by-meeting approach, reducing the likelihood of a back-to-back rate cut in July due to insufficient European data before the next meeting. This decision can be termed a ‘hawkish cut,'” Gaël Fichan, head of fixed income at Bank Syz, said in a note.

Stateside, U.S. Treasurys were higher as investors monitored a rise in weekly jobless claims — potentially supportive of Federal Reserve rate cuts — with the benchmark 10-year edging slightly higher to 4.299%.

Interest rate divergence is likely to drive action in stocks, currencies and bonds in the coming months, according to analysts.

“The euro zone economy is in a different place than the US, which is subject to a resurgence in inflation and a looser fiscal stance. The cost-of-living crisis left a larger dent on household real incomes in Europe, whereas in the U.S. domestic demand is strong,” Yael Selfin, chief economist at KPMG, said in a note.

“In addition, a tighter policy by the U.S. Federal Reserve could provide additional tightening in global financial conditions including via boosting long-term European bond yields, potentially warranting a greater policy offset at the short end of the curve.”