As investors remained focused on forecasts for further monetary tightening, euro zone government bond rates decreased on Monday, just shy of multi-week highs.

According to Bundesbank President Joachim Nagel, the European Central Bank (ECB) must continue raising interest rates even though a recession in Germany is becoming more probable since inflation will remain uncomfortably high through 2023. Investors are also anticipating the German Ifo index later this week, which might herald a recession and lessen the likelihood of an aggressive ECB, as well as purchasing manager index (PMI) data due on Tuesday for clues on inflation.

According to ING analysts, "the August PMIs are not anticipated to present a positive economic picture, so some safe-haven demand for bonds should develop." The 10-year government bond yield in Germany decreased by 3 basis points (bps) to 1.99 percent. It reached 1.242 percent on last Friday, its highest level since July 21.
When investors return from their summer vacation and may need to catch up with the deteriorating inflation outlook and hawkish central bank discourse, the upcoming days will reveal if the market has established a substantial short foundation, according to Commerzbank analysts. Italy's 10-year government bond rate decreased by 1.5 basis points to 3.473 percent after peaking last Friday at 3.533 percent, its highest level since July 22.

Following a high point of 229.4 bps last Friday on predictions of further monetary tightening and some analysts blaming political worries ahead of the September 25 Italian elections, the spread between Italian and German 10-year rates was at 227 bps. The ECB's withdrawal of monetary stimulus has primarily benefited peripheral government bonds, and recent inflation figures have increased expectations of more tightening.

Following the fall of the Mario Draghi-led government, the Italian-German disparity increased to 260 bps before narrowing to about 200 bps. Some analysts were concerned that a right-wing government's plans to lower taxes and spend more on pensions might conflict with EU regulations.

Chinese economy faltering; policy rate cut impact global financial markets

Russian Ruble nears 4-week high against US Dollar

Turkish lira declines after key interest rate is lowered by central bank