Germany's 10-year bund yield steady as Biden abandons election bid
Updates at 1007 GMT
By Samuel Indyk
LONDON, July 22 (Reuters) -Germany's 10-year bund yield was steady on Monday as investors assessed what U.S. President Joe Biden's decision to drop out of the 2024 election race might mean for financial markets and the global monetary policy outlook.
Biden announced on Sunday he would be abandoning his reelection bid against former President Donald Trump, under growing pressure from fellow Democrats as concerns mount about his age and health.
Vice President Kamala Harris is now favourite to win the Democratic nomination and challenge Trump in November's election.
Following Biden's disastrous television debate and the assassination attempt on Trump, markets had been starting to price in a Trump victory.
Analysts presumed the former president's fiscal policy could lead to increased spending and higher inflation, and thus higher bond yields.
Markets will now assess whether Biden's decision to quit the race makes a Trump return to the White House less likely and what impact that may have on monetary policy.
"The focus at the start of the week is on the new dynamics in the U.S. election campaign and the Democratic nomination process, even though Biden's withdrawal was widely expected," said Commerzbank rates strategist Rainer Guntermann.
"The gap between Trump and Harris continues to narrow but remains substantial."
Germany's 10-year bond DE10YT=RR, the benchmark for the euro area, took the news in its stride with the yield last up less than 1 basis point (bp) at 2.468%.
Germany's two-year yield DE2YT=RR, which is more sensitive to changes in monetary policy expectations, was up 2 bps at 2.798%.
"The reality is that things can change between now and the election in November," said Saxo Bank head of fixed income strategy Althea Spinozzi. "The market will be volatile to any news that comes from the U.S. campaign but macro data will be much more important in the coming months."
Domestic euro area data this week includes preliminary purchasing managers index surveys for July on Wednesday and German Ifo business sentiment on Thursday.
The European Central Bank last week kept its policy settings unchanged, and its president, Christine Lagarde, said its next decision on Sept. 12 was "wide open".
ECB policymakers have been quick to back further interest rate cuts, expressing greater confidence that inflation is heading back towards the central bank's 2% goal.
Rate setter Peter Kazimir on Monday left the door open to two more rate cuts this year if data justified them.
The futures market places around a 77% chance of a quarter-point rate cut from the ECB at the next meeting in September, while 43 bps of easing is priced by the end of year, implying one more rate cut and around a 72% chance of a second.
Italy's 10-year yield DE10IT10=RR was down 1.5 bps at 3.756%, narrowing the closely watched 10-year yield gap between Italy and Germany - a gauge of risk investors require to hold Italian bonds - to 127 bps.
Meanwhile, government bond issuance is set to decline this week, according to UniCredit fixed income strategist Francesco Maria Di Bella, with Germany, Italy and Belgium scheduled to sell 18 billion euros ($19.60 billion) of bonds, down from the 27 billion euros last week.
"Primary market activity, which will also involve inflation-linked bonds, will be particularly intense at the short end of the curve," Di Bella said.
($1 = 0.9182 euros)
Reporting by Samuel Indyk; Editing by Sharon Singleton and Christina Fincher
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