ECB's Reluctance to Cut Rates Bolsters German Bonds

The prospect of European Central Bank rate cuts diminished on Thursday as money markets adjusted their expectations, resulting in a three-month high for Germany's two-year yield. The shift comes after the ECB issued a positive assessment of the euro zone's economy, supported by ECB President Christine Lagarde's high bar for further cuts.

Inflation figures from major euro zone economies met or exceeded expectations, reducing the likelihood of future rate reductions. This movement caused longer-dated bond yields to dip slightly, leading to a flattening of the yield curve. The 10-year German bond yield decreased marginally, maintaining a tight spread with Italian bonds.

International influences, such as the Bank of Japan's policy statement, contributed to a decline in longer-dated Japanese yields, impacting global markets. U.S. PCE inflation data, the Federal Reserve's preferred gauge, remains the next crucial factor for market adjustments, as investors assess economic policies' long-term impacts.

(With inputs from agencies.)