Investors flocked to high-quality assets for safety while reducing bets on future European Central Bank rate hikes, driving German government bonds higher.

Short-term UK gilts also advanced.

Meanwhile, Italian and French government bonds declined, pushing peripheral country bond spreads significantly wider.

The German two-year bond yield fell 14 basis points to 3.07%, while the UK two-year bond yield dropped 9 basis points to 4.80%.

Traders are currently pricing in fewer than three additional ECB rate hikes and fewer than four additional Bank of England rate hikes over the next year.

The yield premium on Italian two-year bonds relative to German bonds of the same maturity widened by 25 basis points at close to 53 basis points, marking the largest single-day increase since 2020.

The yield premium on French two-year bonds relative to German bonds of the same maturity closed at 60 basis points, widening by 20 basis points, with the spread reaching its widest level since 2012.

Data since 1999 shows that the French 10-year bond yield is currently 130 basis points above the same-maturity swap rate, the largest premium on record.

Market Summary

The German 10-year bond yield fell 8 basis points to 3.51%.

German government bond futures rose 68.00 points to 120.6.

The Italian 10-year bond yield rose 8 basis points to 4.69%.

The spread between Italian and German government bonds widened by 16 basis points to 119 basis points.

The French 10-year bond yield rose 6 basis points to 4.92%.

The 10-year UK gilt yield fell 3 basis points to 5.4%.