The week began cautiously for the eurozone bond market, as the outlook reflects geopolitical uncertainties and monetary policy expectations. Investors have been closely monitoring diplomatic developments surrounding the war in Ukraine, awaiting further signals from central banks, as this could redefine risk and capital flows in the coming weeks.
Ukraine’s diplomacy and income are monitored by the Market
Euro zone government bonds were in a holding pattern on Tuesday as traders looked ahead to a symposium of global central bankers later in the week, and after talks in Washington on ending Russia’s war in Ukraine. NATO Secretary General Mark Rutte told Fox News on Monday that U.S. President Donald Trump’s meeting with Ukrainian President Volodymyr Zelenskiy and other European and NATO partners had been very successful.
In a social media post late on Monday, Trump said he had called Russian President Vladimir Putin and begun arranging a meeting between Putin and Zelenskiy, to be followed by a trilateral summit among the three presidents. However, questions remain on security guarantees and whether a ceasefire or peace agreement is the best way forward.
Germany’s 10-year bond yield DE10YT=RR, the euro zone benchmark, was down about 2 basis points (bp) at 2.755%. It hit a 4-1/2 month high of 2.787% on Monday. Yields move inversely with prices. Germany’s two-year yield DE2YT=RR, which is sensitive to changes in interest rate expectations, was steady at 1.962%. “The next issue is monetary policy in the U.S. and the discussion about whether the Fed is going to cut in September or not.”
Expectations in Jackson Hole influence monetary policy
Federal Reserve Chair Jerome Powell is due to speak at the Kansas City Fed’s annual symposium in Jackson Hole, as money market traders stick with their bets for a rate cut next month. Futures imply around an 85% chance of a quarter-point rate cut at September 16-17 meeting, little changed from the day before. The Fed’s policy rate has been in the 4.25%-4.50% range since December.
The size and importance of the U.S. economy means changes in Fed rate expectations often influence European and other bond markets. Expectations for European Central Bank interest rates remain well-anchored in the near term, with markets expecting the central bank to remain on hold in September.
Italy’s 10-year bond yield IT10YT=RR was down 1 bp at 3.584%, keeping the spread between Italian and German 10-year yields unchanged at 82 bps. The gap between Italian and French 10-year yields FR10IT10=RR continues to narrow, last at almost 14 bps.
Fiscal pressures make the bond market complicated
In addition to central bank signals, fiscal debates in Europe could also influence investors’ sentiment. According to France’s budget plan, which envisages significant cuts, the situation illustrates the dilemma between fiscal consolidation and political stability. If resistance in parliament intensifies, this could generate turbulence and even impact confidence in the region’s debt markets.
France’s Prime Minister Francois Bayrou unveiled his 2026 budget plan in July that included almost 44 billion euros ($51.39 billion) of cuts.The budget is likely to draw resistance from opposition Socialist lawmakers when parliament returns from recess next month, putting Bayrou’s government at risk of being toppled.
Political risks keep markets on alert
The climate of uncertainty among investors is heightened by the possibility of a future summit involving the United States, Russia, and Ukraine. Negotiations are seen as a path to stability, but doubts persist about security guarantees and the viability of a lasting agreement.
Diplomatic advances and monetary decisions are still hot topics among investors, and European bonds are likely to continue reacting more to headlines than to market trends. Ukraine’s negotiations, combined with signals from Jackson Hole, are likely to determine the course of this scenario, influencing European market yields.
GCN.com/Reuters