The eurozone refers to a specific geographic and economic region that consists of all the EU (European Union) countries. More specifically, those that have incorporated the euro as their national currency. It is important to note that not all of the European Union nations have decided to participate in the eurozone, opting to keep their own currency as a means of financial independence.
A look at the bond market
A government bond refers to a debt security that is issued by a sovereign State. As of 2023, Germany, Italy, Spain, and France were some of the largest issuers of these government bonds. This accounted for 80% of all the issues within the 19 countries distributed in the zone. Eurozone government bond yields held steady on Wednesday, heading for their first weekly decline in a month, as investors took stock of the European Union’s U.S. trade deal and a hefty decline in the euro this week.
The Federal Reserve will deliver its decision on U.S. monetary policy after the European market closes, leaving investors unwilling to push eurozone bonds too far in either direction. With much of the uncertainty over tariffs now removed following the EU deal with the United States for a 15% levy on imported goods, bond yields have been drifting lower this week. Elsewhere, China and the United States agreed to seek an extension of their tariff truce after two days of talks aimed at defusing an escalating trade war between the world’s two largest economies.
Zoning out the current situation
Trade wars such as these can sometimes be caused when a country is of the opinion that another nation is busy engaging in some unfair trade practices. Certain things can trigger this, quota limits on certain imported goods, subsidies for local businesses to allow them to compete against foreign imports, and import taxes. German 10-year yields DE10YT=RR, which serve as the benchmark for the wider euro zone, were down less than 1 basis pointย at 2.681%, and down 3.5 bps so far this week. That would mark the first weekly decline since late June.
Data on Wednesday on eurozone economic growth showed the single currency bloc proved more resilient than expected in the second quarter, growing by 0.1%, against forecasts for no growth, which suggested businesses are adapting to the uncertainty around trade.ย “Despite uncertainty prevailing in the first half of the year, combined growth in the first two quarters has not disappointed,” said Bert Colijn, ING chief economist, Netherlands.
Taking a better look at what the Eurozone has to offer
Separate releases this week have shown French and Spanish second-quarter growth has been better than expected, while that inย Italy shrank unexpectedly in that period.ย Meanwhile, the euroย EUR=EBSย has come underย intense pressureย this week, as relief over the EU–U.S. trade deal has given way to concern about the longer-term economic impact on the regional economy. The currency is heading for a 1.5% weekly drop, its largest since last November.
German two-year yieldsย DE2YT=RRย held at 1.92%, setย for a 2-bp decline this week. Since the ECB’s last meeting, traders have been whittling away at their bets on another rate cut this year, pushing two-year yields to 1.964% last week, their highest since April. Money markets now show the chances of another cut this year have dropped to around 30%, with March seen as the most likely next meeting at which the central bank lowers borrowing costs again.
In basic terms, government bonds are considered a “risk-free” asset or, otherwise termed as a safe investment. The logic behind this is that a country can at any time issue money or increase taxes to honor its debts. In other words, the state basically borrows a certain amount of money for a fixed period. During this term, predefined interest is paid periodically, with the borrowed amount paid back at maturity.
GCN.com/REUTERS.