Euro area yields hold steady after PMI, markets price out ECB 2026 rate hike

By Stefano Rebaudo

March 24 (Reuters) - Euro area yields were broadly steady on Monday after Purchasing Managers' Index (PMI) data was in line with expectations, as investors balanced risks from U.S. tariffs against expectations for stronger growth stemming from investment plans in Germany.

Investors already expected German PMIs to rise sharply as the government planned a spending splurge in infrastructure and defence, and a weak survey for France as political uncertainty continued to weigh.

Euro zone business activity grew at its fastest pace in seven months in March, supported by an easing in the long-running manufacturing downturn.

U.S. President Donald Trump said there will be some flexibility in the tariff policies that the U.S. administration should impose early next month.

Markets will closely watch developments of negotiations regarding a possible ceasefire in Ukraine as the Russian and U.S. delegations began their talks in Riyadh, Saudi Arabia, on Monday morning.

"The March picture that the PMI paints is one of modest improving growth with easing inflation," said Bert Colijn, economist at ING.

"However, next week could already upend that picture as U.S. tariff announcements and possible European retaliation may change the economic landscape significantly."

Germany's 10-year government bond yields DE10YT=RR rose 1 basis point (bp) to 2.778%. They reached 2.746% on Friday, their lowest level since March 5.

"With little prospect of a major boost to defence spending, the outlook for France remains poor," said Andrew Kenningham, chief Europe economist at Capital Economics.

Markets priced in an European Central Bank depo rate at 1.98% at the end of 2025 EURESTECBM6X7=ICAP and 2.02% in July next year. EURESTECBM11X12=ICAP

They briefly bet on an 80% chance of a rate hike in summer 2026, in the days following Germany's announcement of plans to sharply increase fiscal spending in early March. The ECB euro short-term rate forwards indicated a deposit rate of 2.2% in July 2026, and 2% in December 2025.

ECB board member Piero Cipollone said on Monday that key elements such as energy price declines and the euro appreciation strengthen the case for further interest rate cuts.

Germany's 2-year yields DE2YT=RR, which are sensitive to European Central Bank policy rates, were flat at 2.136%.

Italy's 10-year yields IT10YT=RR were also steady at 3.819%. The gap between Italian and German government bond yields DE10IT10=RR was 104 bps.