Thursday, March 28

German yields at multi-year highs, but real rates not far from recent lows


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German yields edged lower on Wednesday, after jumping the previous day, as lack of pushback against the recent Bund repricing by the European Central Bank last week fueled renewed selling pressure in euro zone government bond markets.

Some analysts argued that uncertainty about the monetary policy outlook leaves euro area rates more exposed to spillover effects from foreign markets, mainly from the United States.

Investors’ focus remains on inflation, while a key gauge of long-term expectations rose above 2.41% on Tuesday, for its highest level since 2012.

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German producer prices rose 30.9% in March, reflecting the effects of the war in Ukraine for the first time.

Germany’s 10-year government bond yield, the benchmark of the bloc, fell 1.5 basis points (bps) to 0.904%, after hitting its highest since July 2015 at 0.961% on Tuesday.

“EUR rates are effectively catching up to the move seen in the US, with European markets assuming that the ECB will be forced into as aggressive and hawkish a U-turn as the Fed,” ING analysts said in a research note.

The yield on 10-year US inflation-linked bonds broke above negative territory on Tuesday for the first time since March 2020.

“Looking under the hood, it appears EUR rates have a lower conviction that their domestic central bank will step in aggressively to stop inflation,” ING analysts added.

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“The most obvious indicator is real rates, the difference between expected inflation and nominal interest rates.”

Germany’s 10-year inflation-linked bond yield fell 3 bps to -1.828% after hitting its highest since March 2022 at -1.766% on Tuesday. It recently moved in a -1.8%/-2% range not far from its lowest levels in a decade, after falling below -2% in the first two weeks of March.

Break-even inflation rates – the difference between nominal and inflation-linked yields – were at around 2.8%, a new high since 2010.

The shape of the yield curve shows markets do not anticipate any excessive tightening by the central bank, as it steepened after the ECB policy meeting last Thursday.

The spread between 2-year and 30-year yields widened to almost 98.7 bps versus around 80 bps before Thursday’s ECB meeting.

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The 2/10-year yield gap widened to almost 83.5 bps, for its biggest since December 2018.

The spread between French and German yields was stable at 46 bps as French President Emmanuel Macron and far-right challenger Marine Le Pen will face off on Wednesday in a debate that could be decisive in the race for the presidency.

Three polls put Macron at the highest level since before the first round, with an average score of 55.83%.

Italy’s 10-year bond yield fell 2 bps to 2.539%, with the spread with the 10-year German yield tightening to 163. (Reporting by Stefano Rebaudo; Editing by Clarence Fernandez)

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financialpost.com