Euro zone government bond yields edged lower after German data on Friday, but remained near their highest levels in more than a decade as markets priced in expectations that central bank deposit rates will peak at around 3.75 percent.
In the fourth quarter of 2022, the German economy shrank by 0.4% compared to the previous quarter. Since then, German 10-year and 2-year bond yields have both fallen. Markets have recently reshaped the ECB’s euro short-term interest rate (ESTR) curve after strong economic data and hawkish comments from ECB officials.
According to the data, ESTR will peak at 3.65% in November, which means that the expected deposit rate will be around 3.75%. ING strategists led by Padraig Garvey said that the high core inflation rate in the euro zone means that central bank officials cannot relax, so there is no reason to change market expectations for a further cumulative 125 basis point rate hike by the European Central Bank.
