German Bund Yield Eases as Eurozone Inflation Cools

Germany’s 10-year Bund yield dipped to 2.87% as investors absorbed signs of slowing inflation across the eurozone. January’s CPI eased to 1.7%, well below the ECB’s target, while core inflation unexpectedly fell to 2.2%, its lowest level since October 2021, raising concerns among policymakers about the euro’s rapid appreciation and the potential resumption of rate cuts paused in June. The ECB is set to announce policy on Thursday, widely expected to keep rates on hold for a fifth consecutive meeting, with officials likely to assess the deflationary impact of a stronger euro. ECB President Christine Lagarde is expected to reiterate that policy remains in a “good place,” with markets pricing in steady rates through 2026. Despite the recent dip, Bund yields remain near the March 2025 peak just above 2.9%, supported by a surge in debt issuance as Germany plans to raise a record €512 billion this year to fund infrastructure projects and boost defense spending.

Germany’s 10-year Bund yield rose to 2.89%, approaching a March 2025 peak just above 2.9%, amid a surge in debt issuance as the country plans to raise a record €512 billion this year to fund infrastructure upgrades and bolster defense spending. Investors also weighed the potential impact of a more hawkish-than-expected Trump nomination of former Federal Reserve governor Kevin Warsh as the next Fed chair, while focusing on the upcoming European Central Bank meeting, where policymakers are expected to leave monetary policy unchanged and assess the deflationary impact of a stronger euro. Last week, ECB policymaker Martin Kocher warned that further euro appreciation could prompt a resumption of interest-rate cuts. The euro recently hit a 4½-year high above $1.20 following Trump’s comments that he was unconcerned about the dollar’s recent decline. Money markets currently assign roughly a 20% probability of an ECB rate cut in September and a 30% chance of a rate hike in April 2027.

Germany’s 10-year Bund yield settled at 2.85%, retreating from near 10-month highs, as investors looked ahead to the European Central Bank’s meeting, where policymakers are expected to weigh the deflationary impact of a stronger euro on the policy outlook. The euro hit a 4½-year high above $1.20 at the end of January following US President Trump’s comment that he was unconcerned about the dollar’s recent decline. Meanwhile, ECB policymaker Martin Kocher cautioned that further euro strength could prompt the central bank to resume interest-rate cuts. Money markets reflected the shift in expectations, pricing in roughly a 30% chance of a rate cut by September, up from less than 10% a week ago, while the probability of a rate hike in April 2027 fell to 20%, down from 50%. On the economic data front, Germany’s economy grew 0.3% in Q4 2025, slightly above forecasts of 0.2%, providing modest support for the market outlook.