German Bond Yields Fall Following Unexpectedly Low Eurozone Inflation Data for December

The German federal bond market experienced a notable rally on Wednesday, January 7, 2026. This strengthening was a direct consequence of the release of surprisingly subdued inflation figures for December 2025 originating from both Germany and France. A key indicator of this positive shift was the yield on ten-year German Bunds, which dipped to 2.81% at the time of observation. This level marked a decrease from the previous week's 2.87% and was also lower than the prior day's reading of 2.8460%, clearly signaling heightened investor appetite for long-term German sovereign debt.

In Germany, the Harmonised Index of Consumer Prices (HICP) for December 2025 registered a year-on-year drop to 1.8%. This represents a significant deceleration compared to the 2.3% recorded in November. Furthermore, this figure fell below the European Central Bank's (ECB) midpoint target of 2%, a threshold not breached since September 2024. Across the border, inflationary pressures in France proved even more contained, with the French HICP for December 2025 coming in at a mere 0.7%. Taken together, the broader Eurozone saw its overall inflation rate slow to the targeted 2.0% year-on-year for December 2025, perfectly aligning with the ECB's benchmark.

Underlying inflation metrics, which strip out volatile energy and food prices, also showed cooling. This core inflation figure declined to 2.3%, down from 2.4% the month before. Specifically for Germany, core inflation eased to 2.4% in December, marking its lowest point since June 2021. These fresh macroeconomic statistics immediately fueled market speculation regarding the ECB's next moves in monetary policy. Market participants concluded that such low inflation readings might prompt the central bank to contemplate further interest rate reductions sometime in 2026.

Despite the market's reaction, a divergence exists between these expectations and the official stance of the European Central Bank. At its most recent meeting on December 18, 2025, the ECB's Governing Council opted to keep key interest rates steady, suggesting that any further easing of policy was unlikely in the immediate future. Moreover, the ECB projected the inflation rate for 2026 to settle at 1.9%.

Diego Iscaro, Head of European Operations at S&P Global Market Intelligence, observed that the December data was unlikely to sway the ECB's current approach, anticipating rates will remain unchanged for the foreseeable future. Although there was a short-term market reaction reflected in falling bond yields, interest rate swap markets, as of January 7, 2026, now price in only a minimal chance of an additional ECB rate cut this year. Analysts point to persistent uncertainty surrounding the long-term inflation trajectory, citing potential external headwinds, such as Germany's fiscal policy decisions or a strengthening euro, as factors that could influence the path ahead.