Market Analysis

Euro zone borrowing costs increased on Thursday following a shift in Federal Reserve policymakers' outlook, reducing their median projection for interest rate cuts this year from three to just one, down from March.

Yields across the bloc saw their most significant daily rise since mid-May on Wednesday after U.S. inflation data indicated softer-than-expected results.

Money markets now reflect a 57 basis point expectation for European Central Bank rate cuts in 2024, down from 63 basis points prior to the Fed statement, suggesting one cut in 2024 with a roughly 30% chance of a third cut. Meanwhile, markets discounted 44 basis points of Fed cuts, down from 51 basis points before the U.S. central bank's latest policy meeting.

Germany's 10-year bond yield, which serves as the euro area benchmark, increased by one basis point to 2.54%. It had reached 2.707% by the end of May, its highest level since mid-November.

The 2-year German government bond yield, more sensitive to rate expectations, rose one basis point to 2.97%. Recently, it peaked at 3.125%, its highest since mid-November.

Italy's 10-year yield climbed 3 basis points to 3.95%. The yield spread between Italian and German bonds, an indicator of investors' risk premium for holding bonds from the euro area's most indebted nations, widened by 3 basis points to 140 basis points. Earlier this week, it reached 150.6 basis points, its widest since February.

The spread between French and German bonds stood at 61.4 basis points, having recently touched 66.9 basis points, its widest since March 2023.

Paraphrasing text from "Reuters" all rights reserved by the original author.