July 23 (Reuters) - Euro zone government bond yields
dropped on Tuesday after rising the day before as investors
awaited developments in the U.S. presidential election campaign
amid expectations of stability in the European Central Bank's
monetary easing path.
U.S. President Joe Biden abandoned his reelection bid on
Sunday and endorsed Vice President Kamala Harris as the party's
candidate to face Republican Donald Trump.
Analysts said it would take weeks before clues emerged about
whether Harris can undermine Trump's chances of winning the Nov.
5 election.
U.S. Treasury yields edged up on Monday as markets assessed
the uncertainty surrounding the race for the White House.
Germany's 10-year government bond yield, the
euro area's benchmark, dropped 3 basis points (bps) to 2.45%
after rising 2 bps the day before.
ECB Vice-President Luis de Guindos hinted at a possible
interest rate cut in September, singling out the ECB's new
projections as the "most important" factor in determining
whether inflation is falling back to target.
Money markets are currently pricing an around 80% chance of
a rate cut in September and the same chance
of two additional rate cuts by year-end..
"As Fed and ECB cuts start materialising, we expect yields
to go lower, but a well-anchored terminal ECB rate means that
the scope for lower rates could be limited in the euro zone,"
said ING analysts, recalling that all the ECB's Surveys of
Monetary Analysts have shown an ECB terminal rate of 2.25%.
The yield gap between Italian and German 10-year bonds
- a gauge of the risk premium investors demand to
hold Italian debt - was at 128 bps after last week hitting 120
bps, a level seen before French President Emmanuel Macron called
for snap elections, sending jitters across financial markets.
Macron's decision set off a political earthquake, offering
the far right a shot at political power and raising fears that
such a government could increase fiscal spending, threatening
the sustainability of France's public debt.
Those fears subsided after the outcome of the vote left
Macron's Together group in charge of forming a new government
without far-right and far-left parties.
"With the positive momentum and lighter supply ahead, we
estimate net issuance of close to zero until the end of the
year. BTP spreads have scope for further performance, not only
versus Bunds but also versus OATs," said Hauke Siemssen, rate
strategist at Commerzbank.
The yield spread between Italian and French bonds
hit 55 bps early last week, its lowest level since
October 2021.
The so-called peripheral euro zone countries, including
Italy, Spain, Portugal and Greece, have seen their yield spread
tighten as France's public debt trajectory has caused increasing
concern among market participants.