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Euro zone bond yields rise to one-month high

BY Reuters | ECONOMIC | 11:30 AM EST

By Harry Robertson

LONDON, Dec 23 (Reuters) - Euro zone government bond yields rose to their highest level in around a month on Monday as investors continued to try to gauge the outlook for central bank rate cuts in 2025.

The Federal Reserve last week put upward pressure on U.S. government bond yields, which set the tone for other markets around the world, when policymakers said they now expect to cut rates twice in 2025, down from a previous estimate of four cuts.

Germany's 10-year bond yield, the benchmark for the euro zone, rose to 2.327% on Monday, the highest level since Nov. 22, up around 4 basis points (bps). Yields move inversely to prices.

Trading volumes were lower due to traders being off over the holiday season, potentially accentuating price moves.

European Central Bank (ECB) President Christine Lagarde said the euro zone was getting very close to reaching the central bank's medium-term inflation goal, according to an interview published by the Financial Times on Monday.

The ECB cut rates for a fourth time to 3% this month but euro zone bond yields rose after Lagarde struck a slightly tougher tone than expected, saying the fight against inflation was not over.

Lagarde told the FT that headline inflation was at 2.2%, but services inflation remained at 3.9% and "is not budging much".

Irish central bank chief Gabriel Makhlouf warned that elements of services inflation in the euro zone were concerning.

Germany's two-year bond yield, which is sensitive to ECB rate expectations, was last up 3 bps at 2.071%.

Italy's 10-year yield rose 5 bps to 3.50%, after hitting 3.503%, its highest since Nov. 25. The gap between Italian and German yields stood at 117 bps.

Investors face an uncertain 2025, with U.S. President-elect Donald Trump's policies a wild card.

Money market pricing on Monday showed investors expect around 115 bps of rate cuts from the ECB next year, little changed from Friday.

(Reporting by Harry Robertson; Editing by Kevin Liffey, Ed Osmond and Emelia Sithole-Matarise)

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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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