The market is betting on the European Central Bank speeding up its interest rate cuts, as seen in the inverted yield curve trend in German government bonds.

As market participants anticipate the European Central Bank (ECB) accelerating rate cuts to address concerns over slowing economic growth, key parts of the German government bond yield curve have returned to normal levels. On Monday, the yield on two-year German government bonds fell below the yield on ten-year government bonds, resulting in the yield spread between the two turning positive for the first time since November 2022. Previously, the Federal Reserve and the Bank of England had also adopted loose monetary policies, and similar phenomena have occurred in the US and UK markets. This repricing of yields comes against the backdrop of increasingly clear signs of economic recession in the Eurozone. The latest data shows contraction in private sector activity in the Eurozone for the first time since March. The German central bank stated last week that Germany may have entered a mild recession. Over the past two years, as expectations of the ECB maintaining a tight monetary policy have grown, the German government bond yield curve has inverted, with short-term yields higher than long-term yields. This has prompted investors to buy longer-term bonds, disrupting the traditional upward sloping yield curve. However, with Eurozone inflation hovering slightly above the central bank's target at a three-year low, the Federal Reserve has initiated a loosening cycle by cutting rates by 50 basis points. Market expectations for further ECB easing have also increased accordingly. The swap market currently projects an additional 43 basis point rate cut by the end of the year, up from 38 basis points last week. This month, the yield on two-year German government bonds has dropped by 25 basis points to 2.14%, while the yield on ten-year bonds has fallen by 15 basis points to 2.15% during the same period. It is worth noting that the spread between French and German benchmark bond yields has reached its highest level since early August, reflecting investor concerns over political and fiscal challenges facing France. The credit default swap (CDS) spread, a risk indicator for France, has surged to 80 basis points, marking the largest increase since August 5. Since French President Emmanuel Macron unexpectedly announced early elections in June, investor concerns about France's ability to control its massive deficit in the long term have intensified.