Short-dated yields tumble as Trump wins, markets price in more ECB easing by June
Euro area yields drop after Trump wins US elections
Investors fear US tariffs could hurt European economy
Markets price in more ECB easing by June 2025
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 EURESTECBM5X6=ICAP from 2.18% late Tuesday.
They also fully priced in a 25 bps rate cut in December EURESTECBM1X2=ICAP 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 DE2YT=RR, 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 DE10YT=RR fell 2.5 bps to 2.41%, leading the gap between 10-year and 2-year yields DE2DE10=RR 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 US10YT=RR 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.
Reporting by Stefano Rebaudo, editing by Alexandra Hudson
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
