Euro zone bond yields dip after Bessent fuels speculation over large Fed cut

By Samuel Indyk

LONDON, Aug 14 (Reuters) - Euro zone bond yields fell slightly on Thursday, extending a drop from Wednesday as investors priced in more easing from the U.S. Federal Reserve after Treasury Secretary Scott Bessent urged the central bank to opt for a large interest rate cut.

In an interview on Bloomberg TV, U.S. President Donald Trump's influential right-hand man on the economy said there was "a good chance" the Fed lowers interest rates by 50 basis points (bps) when it convenes next month.

Investors acted to fully price in a rate cut from the Fed in September, with around a 5% chance of a larger 50-bp move. Money market futures imply about a 50% chance that the European Central Bank lowers borrowing costs again by the year's end.

The size and importance of the U.S. economy means expectations about Fed rate cuts often heavily influence other markets.

"We haven't had a major catalyst from the euro area so, more broadly, moves have been driven by the U.S.," said Mohamad Al-Saraf, FX & fixed income research associate at Danske Bank.

"In general, moves this week have been driven by the better-than-feared U.S. inflation report and it now looks pretty much a done deal that the Fed will cut next month. The question is whether they go for 25 or 50 basis points."

Tuesday's U.S. inflation report was a mixed bag, with headline consumer prices rising marginally but underlying measures showing signs of building price pressures.

Germany's two-year yield DE2YT=RR, which is sensitive to changes in monetary policy expectations, was down 1 bp at 1.926%. It fell 3.5 bps on Wednesday, its biggest daily drop since August 1.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro area, was down 2 bps at 2.66% after falling 6.5 bps on Wednesday.

Italy's 10-year bond yield IT10YT=RR fell 2.5 bps to 3.46%, pushing the spread between Italian and German 10-year yields DE10IT10=RR to 78.2 bps, the tightest since at least 2011, according to LSEG data.

The yield gap between Italian and French 10-year yields FR10IT10=RR narrowed to about 14 bps, reflecting increasing concerns about France's fiscal trajectory.

France unveiled a 2026 budget plan in July that included almost 44 billion euros ($51.41 billion) of cuts , which will probably draw resistance from Socialist lawmakers when parliament returns from recess next month.

Worries about France's debt sustainability have been driving the narrower spread between French and Italian yields, according to Danske Bank's Al-Saraf.

Investors were awaiting U.S. factory inflation and jobless claims data due later on Thursday, as well as the Alaska summit between Trump and Russian President Vladimir Putin on Friday.

Analysts have said a ceasefire in Ukraine could support riskier assets and weigh on government bond prices, lifting yields.

Germany's 30-year yield DE30YT=RR, which touched an 11-year high of 3.309% on Tuesday, was down 1 bp at 3.222%.