The yield on the German 10-year Bund fell to the 2.55% mark on Tuesday, extending the 13bps drop from the second quarter of the year amid evidence that the ECB has room to maintain an accommodative policy stance. The headline annual inflation rate for the Eurozone was at 2% in June, remaining within the ECB’s target amid softer-than-expected price developments in Germany and Italy.
The softer inflation rate coincided with persistent headwinds to growth, recently magnified by the threat of US tariffs after the EU noted that they will tolerate the 10% baseline tariff passed by Washington, supporting the case for more accommodative policy by the ECB. Flexibility in maintaining its lower rate was also owed to the euro’s strength, which appreciated by over 13% against the dollar this year. The yield on the 10-year Bund dropped in the second quarter despite Germany’s move to aggressively increase debt issuance for investment on infrastructure and defense.
