German yields at multi-year high, real rates near recent lows

German government bond yields fell on Wednesday but were still at multi-year highs after the European Central Bank’s lack of reaction to a recent Bund price revision fueled fresh selling pressure in the bond market.

After last week’s ECB meeting, some analysts argued that the uncertainty surrounding the monetary policy outlook was increasing volatility and leaving eurozone rates more exposed to spillover effects from overseas markets, mainly the United States.

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

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

“The market continues to peg a Eurozone terminal rate at 1.5% in line with money market bets on future rate hikes, while acknowledging that there will be no asset purchases very soon,” said Rohan Khanna, strategist at UBS.

Some analysts expect the ECB to end its bond buying program as early as July.

However, “if Friday’s PMI data shows a marked slowdown in economic activity, Bund yields will likely fall as the ECB may delay monetary tightening,” he argued.

Germany’s 10-year government bond yield fell 5 basis points (bps) to 0.904%, after hitting its highest since July 2015 at 0.961% on Tuesday.

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

The yield on 10-year Treasury inflation-protected securities (TIPS) hit two-year highs on Wednesday, briefly moving into positive territory for a second straight day.

“Looking under the hood, it appears euro rates are less confident that their national central bank will intervene aggressively to halt inflation,” ING analysts added, citing actual rates and curves. performance in the euro zone.

Germany’s 10-year inflation-linked bond yield fell 5 basis points to -1.848% after hitting its highest since March 2022 at -1.766% on Tuesday. It has recently been trading 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.

Breakeven inflation – the difference between nominal and inflation-indexed returns – was around 2.7%, a new high since 2010.

The shape of the yield curve shows that markets do not expect excessive central bank tightening, as it steepened after the ECB’s monetary policy meeting last Thursday.

The spread between German 2-year and 10-year yields was 83 basis points on Wednesday, its widest level since December 2018, from around 67 basis points before the ECB meeting.

The spread between French and German rates remained stable at 46 bps. 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 place Macron at the highest level since before the first round, with an average score of 55.83%.

The Italian 10-year bond yield fell 8 basis points to 2.476%, with the spread against the German 10-year rate narrowing to 160 basis points.

(Reporting by Stefano Rebaudo; Editing by Clarence Fernandez and Kim Coghill)

James R. Rhodes