Euro zone government bond yields drop after Fed, await BoE

By Stefano Rebaudo

March 20 (Reuters) - Euro zone government bond yields dropped on Thursday after U.S. Federal Reserve officials projected two 25 basis point rate cuts this year, while expressing concern about growth risks.

The Trump administration's initial policies, including extensive import tariffs, appear to have tilted the U.S. economy toward slower growth and at least temporarily higher inflation, Fed Chair Jerome Powell said on Wednesday.

Markets await the outcome of the Bank of England policy meeting later in the session.

Germany's 10-year government bond yields DE10YT=RR were down 3 basis points (bps) at 2.77%, after reaching 2.748% the day before, its lowest since March 5. They hit 2.938% last week, their highest level since October 2023.

Germany's 2-year yields DE2YT=RR, more sensitive to European Central Bank policy rates, dropped 3 bps at 2.16%. They reached a two-week low at 2.149% on Wednesday.

Traders priced in an ECB deposit rate of about 2.02% in December EURESTECBM6X7=ICAP, down from 2.05% on Wednesday. They also accounted for an around 50% chance of a 25 bps cut in April.

The spread between French and German bond yields DE10FR10=RR - a market gauge of the risk premium investors demand to hold French debt – dropped to 62.30 bps, its lowest level since mid-July. Budget minister Amelie de Montchalin said France's 2024 public accounts may show a deficit a little bit smaller than the 6% of economic output currently expected.

Italy’s 10-year yields IT10YT=RR fell 4.5 bps to 3.81%. The gap between Italian and German government bond yields DE10IT10=RR dropped to 103 bps.