Fed hawkish and German inflation push 10-year Bund yield closer to 0%

The German 10-year bond yield moved closer to positive yield territory on Thursday, just as eurozone borrowing costs hit new highs amid the hawkish tone of the US Federal Reserve and new highs. signs of rising German inflation. The Italian 10-year bond yield was 5 basis points higher at 1.29%, after hitting its highest level since July 2020 at 1.31%.

Most of the money block’s other 10-year bond yields rose 4 basis points on the day and reached or near multi-month highs, reflecting a sell-off in global bond markets led by US Treasuries. In Germany, the yield on the 10-year Bund, which was rolled over to a new benchmark, fell to -0.033%, its highest level since May 2019, according to data from Refinitiv.

Analysts said that although the rollover in a new contract made the movement of Bund yields appear large, even if measured on a continuous basis, yields were hitting new highs over several months. And trading under the new benchmark puts German 10-year yields a striking distance of 0% – a level it last exceeded in May 2019.

The December Fed meeting minutes, released on Wednesday evening, showed that a tight job market and high inflation could prompt the US central bank to raise rates earlier than expected and start cutting its overall holdings – a process known as quantitative tightening (QT). “The discussion on quantitative tightening in the minutes is very significant,” said Antoine Bouvet, senior rate strategist at ING.

“First and foremost, it shows the extent of the Fed’s change in tone as it considers a more aggressive reduction in its balance sheet alongside the hikes.” Fed funds futures imply an almost 80% chance of a rate hike to 0.25% at the March Fed meeting, and rates around 0.80% by the next. end of the year.

The acceleration in expectations of US rate hikes spread to European markets. Money market futures dated to the European Central Bank’s October meeting showed that a 10bp rate hike was almost fully integrated. They also expected a tightening of 15bp by December, down from around 13bp on Wednesday.

Inflation figures from the European economy, Germany’s economic powerhouse, contributed to the downward mood in bond markets. Consumer price inflation rose in several German states in December, according to regional data released Thursday, indicating an unexpected increase in the nationwide inflation figure.

Germany’s 10-year inflation-linked bond yield hit two-month highs and last rose 9 basis points to -1.88%. “There is always the feeling that inflation (in the euro zone) could surprise on the rise longer than expected, so the markets must position themselves in the belief that the ECB could capitulate and move earlier on rates,” he said. said Peter McCallum, Mizuho’s rates strategist.

“We think inflation will peak, but it could happen later in the first quarter.”

(This story was not edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

James R. Rhodes