Euro Zone bond yields rise ahead of key US Federal Reserve rate decision

Euro bonds climb: Euro zone bond yields edged up on Wednesday as investors awaited the US Federal Reserve’s interest rate decision, which is expected to trigger a strong market response.

Germany's 10-year bond yield rose by 4.5 basis points to 2.19 per cent, its highest level since September 9. Despite this, euro zone bond yields have been generally trending downward in recent months, reflecting rate cuts by global central banks.

Fed rate cut uncertainty

Wednesday's market movement was restrained, with the Fed's rate decision scheduled for 2 p.m. EDT (1800 GMT). While it is widely anticipated that the Fed will begin a rate-cutting cycle, traders are unsure whether the cut will be 25 or 50 basis points. According to the CME FedWatch tool, there's a 61 per cent chance of a 50-basis-point cut.

Jim Reid, Deutsche Bank’s global head of macro research, commented, "With uncertainty still hanging in the air, we’re likely to see a notable market reaction regardless of tonight's decision. It's been over 15 years since we've seen this level of unpredictability so close to a Fed decision."

US data drives markets

European markets have been closely tied to US data and policy moves in recent months. Meanwhile, euro zone inflation data for August aligned with expectations and had little impact on bond markets.

While the European Central Bank is unlikely to cut rates in October, a 25-basis-point reduction is expected by December, following rate cuts in June and earlier in September.

Italy's 10-year government bond yield increased by 6 basis points to 3.57 per cent, while the spread between Italian and German 10-year yields stood at 138 basis points. Germany's two-year bond yield, which responds more to ECB rate expectations, rose 2.5 basis points to 2.26 per cent.