By Samuel Indyk

Germany’s 10-year government bond was in demand on Tuesday as global risk sentiment was dented by soft U.S. economic data, while Federal Reserve rate-setters put forward competing views of the state of the economy, further muddying the rate outlook.

European equities opened on the back foot following a slump in Asia, while U.S. equity futures were pulling back after recent strong gains as major banks warned of a correction.

The broad risk-averse tone echoing through global markets boosted the appeal of safe-haven German government bonds, particularly against euro zone peers.

“When you have risk-off, with selling in equity markets, Bunds (German government bonds) are the euro-denominated safe-haven to go to,” said Rene Albrecht, rates analyst at DZ Bank.

Germany’s 10-year bond yield (DE10YT=RR), the benchmark for the euro zone, was down 1.5 basis points at 2.651%, having touched its highest since October 10 the day before. Bond yields move inversely with prices.

France’s 10-year bond yield (FR10YT=RR) was little changed at 3.437%, widening the yield gap between French and German 10-year bonds (DE10FR10=RR) to 79 bps.

U.S. DRIVES EURO MARKETS

The European Central Bank had a largely uneventful policy meeting last week, keeping rates unchanged, with President Christine Lagarde reiterating that policy is in a “good place”.

Market pricing for another rate cut by the third quarter of next year stands at about 50%, little changed from before last week’s decision.

“If there is another window for another cut from the ECB, it might be in the first half of 2026, probably the second quarter, in the case where growth does not pick up,” DZ Bank’s Albrecht said.

Germany’s two-year yield (DE2YT=RR), which is sensitive to changes in ECB policy expectations, was little changed at 2%.

With the ECB signalling it is comfortable with current policy settings, euro zone bond markets have been taking cues from the United States.

The Fed cut interest rates last week but Chair Jerome Powell signalled that could have been the last move of this year. Fed policymakers have since pushed divergent views of the economy in recent speeches, putting another rate cut in December in doubt.

Traders are now pricing in about a 67% chance of a quarter-point rate cut next month, compared with about a 90% chance a week earlier.

With an absence of official data due to the ongoing U.S. government shutdown, a survey of U.S. manufacturers took on extra importance on Monday. The poll painted a gloomy picture of the factory sector in October as new orders remained subdued.

“There really wasn’t much to reassure investors on the outlook, particularly given this is one of the early stats we have that covers Q4 and the government shutdown,” said Deutsche Bank strategist Jim Reid.