Euro zone yields edge lower as bonds benefit from equity market jitters

By Alun John

LONDON, Feb 24 (Reuters) - Euro zone government debt yields continued to drop on Tuesday as bonds benefited from some safe-haven flows, sending Italy's 10-year yield to its lowest in over a year, and France's to its lowest in six months.

Traders are grappling with uncertainties ranging from what will happen with U.S. tariffs to growing risks of conflict between the U.S. and Iran, as well as investor angst about the impact of artificial intelligence on software and other industries that has been roiling stock markets.

That has been helping government bonds particularly in Europe, sending yields steadily lower.

Germany's 10-year yield, the benchmark for the euro zone, was down 0.5 basis points at 2.71%, after hitting 2.697%, a fresh 2-month low. It was down from 2.90% towards the start of February DE10YT=RR.

"Volatility in equities due to renewed tariff uncertainty and AI jitters is making bonds look more attractive on a relative basis," said Michiel Tukker, senior rate strategist at ING.

Yields in Europe have fallen more than in the U.S., given the lack of clarity about the future of tariffs and their impact on the U.S. deficit and, in turn, U.S. Treasuries.

Tukker said the U.S. underperformance was also linked to it being more exposed to AI developments than Europe.

PERIPHERAL DEBT HOLDS STRONG

Other European yields have also been falling. Italy's 10-year yield was also down 0.5 bps at 3.32%, after hitting 3.315%, its lowest since December 2024 IT10YT=RR.

The gap between German and Italian debt was hovering around 60 bps, not far from the 53.50 hit in mid-January, its lowest since August 2008 DE10IT10=RR.

France's 10-year yield was down a similar amount at 3.27%, its weakest since August 2025 FR10YT=RR.

Normally debt of riskier European countries underperforms Germany's at times of market stress, but this is not the case currently.

"At the moment, from a macro perspective Europe is quite a good space, the growth picture improving, the fiscal story improving, the rates volatility is extremely low and Italian debt still gives you a nice yield pickup," said Tukker.

Shorter-dated rate-sensitive European yields moved less than longer-dated debt. Germany's 2-year yield dropped a whisker to 2.04% DE2YT=RR.

Euro zone inflation and the European Central Bank's interest rate policy remain in a "good place", ECB President Christine Lagarde said on Monday, repeating her long-standing guidance, which signals that policy change is not being considered.