We nor markets expect a rate cut by the European Central Bank, but we do take a more bullish view on the short end of the Bund curve. Downside risks from (geo)politics continue to loom in the background. Meanwhile, in the US a good 10yr auction has helped validate the rally in the rear-view mirror, and makes an attack of 4% more probable.No ECB Cut Expected, but We See Room for Schatz Yields To Nudge LowerThursday sees the ECB Governing Council decide on monetary policy. Since the hawkish members of the Council have been more vocal since the summer, and given largely resilient data and even a small uptick in August inflation, the market is not priced for any policy change at this stage. It is only further out into the next year that market pricing still reflects the probability of one more rate cut – for June 2026 some 16bp of easing are priced in. This rather muted view on further easing potential is also reflected in German 2y Schatz yields, currently at 1.95%.We think the market looks too complacent about the downside risks. Be it the impact of the Fed starting to cut rates at a faster clip and its implications for the exchange rate or that the US-EU trade framework still leaves room for escalation. More domestically the political situation in France is also something that could still deteriorate and at least turn into something for the market that the ECB would want to avoid adding fuel with an overly hawkish appearance.More relevant today than the rate decision will therefore be how Lagarde describes the balance of risks around the outlook. The ECB will present new projections and given how e.g. changes in interest rates and FX feed into these, our economists think that there could be slight downward revisions for growth and inflation in 2026.Viewed through the lens of the German 2Y Schatz yield sitting close to 2% we therefore see more reasons for that yield to go lower. Part of the reasoning being that at 10bp above the risk-free ESTR overnight indexed rate, the Schatz is at the top end of the range this year – it briefly traded flat to the swap rate in the risk-off environment that followed ’Liberation Day’. One could well make the case that the current environment still hold plenty of risk factors if alone in (geo-) politics.The US 10YR Yield Post the 10YR Auction Gets Closer to a Break Below 4%, Even if FleetingIn the US, if the 10yr wanted an excuse to break for 4%, and maybe break below, it’s had some excellent opportunity Tuesday (jobs revisions) and Wednesday (core PPI at -0.1% month-on-month), plus, evidence from the PPI report that CPI may be blunted by corporates taking some of the hit (for now) on tariffs. We then had a 10yr auction that went very well, helping to validate the price action that took the 10yr to sub-4.1%.Ahead, we continue to anticipate an attack on 4% for the 10yr yield, and likely a break below. But, we also view any such move as an overshoot to the downside. We maintain the view that neutral for the 10yr yield is in the 4.25% to 4.5% area, and the current inflation environment (notwithstanding PPI, consumer inflation is still in the 3% area, and still has upside potential) suggests we should or could trend back up there (throw in the still elevated fiscal deficit too).Thursday sees the 30yr auction. The 10yr was helped by a concession build versus events. The 30yr may not get the same, which might make it more prone to tail. But even if it did, the yield validation in the 10yr area is a big positive from this week’s auctions so far.Thursday’s Events and Market ViewsMarkets don’t price in any probability of an ECB rate cut. More interesting could be the US CPI numbers for August, whereby both headline and core figures are expected to remain hot at a 0.3% increase month-on-month. Other US data includes jobless claims, which may get more attention after the disappointing payrolls number earlier. Consensus, however, sees the number nudging lower from 237k to 235k.In terms of supply we have the UK with 7Y and 4Y gilt tenders for £2.25bn. Furthermore, Ireland will auction a 9Y IRISH and 18Y green IRISH for a total of €1.5bn, and Italy 3Y and 5Y BTPs totalling €4.75bn. From the US we have $22bn of 30Y Bonds being auctioned.***Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read moreOriginal Post