UK government bonds have shown mixed performance, underperforming German bonds but performing better than US bonds. This movement is driven by shifts in market expectations regarding real interest rates. With recent changes in market sentiment, traders have adjusted their expectations for interest rate cuts by the Bank of England, reducing bets by as much as 9 basis points. The market now anticipates a 57 basis point reduction by the end of next year.
The yield on UK 10-year bonds saw a significant rise, increasing by 7 basis points to reach 0.92%, the largest weekly gain in a week. Meanwhile, German bonds experienced a downturn, influenced in part by developments in France. The yield spread between French and German bonds widened by 2 basis points to 77 basis points, following the National Assembly in France rejecting the 2025 budget amendment, with upcoming debates expected in the Senate.
Traders' expectations for European Central Bank interest rates have remained relatively stable, with a forecasted rate cut of 30 basis points next month and a cumulative 140 basis point reduction by the end of 2025.
Elsewhere in the market, German bond yields increased by 4 basis points to 2.36%, while German bond futures fell by 22 points to 132.29. Italian 10-year bond yields rose by 5 basis points to 3.64%, with the yield spread between Italian and German bonds expanding by 1 basis point to 128 basis points. Additionally, French 10-year bond yields climbed 5 basis points to 3.13%. Finally, UK 10-year bond yields grew by 7 basis points to 4.50%.
