German 10-year Bund yield hits 1% for first time since 2015 before falling

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The benchmark 10-year German Bund yield hit 1% for the first time since 2015 on Tuesday, before falling as a dose of caution was called for ahead of expected interest rate hikes in the United States and Britain this week.

Australia’s central bank raised its cash rate by an unexpected 25 basis points (bps) to 0.35% earlier, the first hike in more than a decade, and announced more to come .

This reminder that major central banks are determined to contain inflation helped push yields on the German Bund to 1.016%. But yields fell as the session progressed and last fell 2.3 basis points to 0.93%.

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Yields on the 10-year US Treasury, which rose above the key 3% level on Monday, also fell as investors recovered from battered bonds and hedged positions ahead of the Federal Reserve’s two-day meeting.

The Fed is expected to conclude Wednesday’s meeting with a 50 basis point rate hike. The Bank of England is expected to raise rates by 25 basis points on Thursday.

“A hawkish surprise from the Fed involving a 75 basis point hike would mean German bond yields could rise to 1.25% by the end of this week or early next week,” Rohan Khanna said. senior strategist at UBS.

Eurozone producer prices rose more than expected in March as energy prices more than doubled year-on-year, data showed on Tuesday, while unemployment continued to fall, hitting a new record high. .

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The yield on Italian 10-year bonds fell 2.5 basis points, after hitting its highest level since March 2020 at 2.9%.

The 10-year yield spread between Italy and Germany widened briefly to 192 basis points, its widest since June 2020.

“So far, the widening of spreads has been reasonably orderly,” said Fabio Castaldi, chief investment officer at Pictet Asset Management.

“However, in the event that these dynamics become disorderly, we would expect further ECB action to avoid fragmentation,” he added, referring to widening yield spreads which could hamper the mechanism. transmission of monetary policy.

Castaldi said “the 200 basis point target (for the Italian-German spread) was in sight.”

Inflation remained in focus, with the Eurozone Market Expectations Indicator at 2.43% after hitting 2.57% last week, the highest since 2012, according to Central Bank data. European. .

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Commerzbank analysts have flagged the correlation between inflation thresholds and oil prices and the potential disruptive impact of Chinese lockdowns on the supply chain, which could boost inflation.

Oil fell about 1% as worries about demand due to prolonged COVID lockdowns in China outweighed support for a possible European oil embargo on Russia.

Germany’s 10-year break-even rate, the difference between inflation-linked and nominal bond yields of the same maturity, was 2.68%, just off its highest since August 2010 of 2.77% . Germany meanwhile sold €560 million in a top-up to its 0.10% inflation-linked bond, 2033 at a low of 122.1, with an average yield of -1.73%.

(Reporting by Stefano Rebaudo; Additional reporting by Dhara Ranasinghe; Editing by Jason Neely and Andrea Ricci)

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James R. Rhodes