Germany’s 10-year Bund yield turns positive for first time since 2019
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Germany’s 10-year bond yield, a benchmark for borrowing costs across the eurozone, swung above zero for the first time since 2019 as investors bet central banks will need to withdraw stimulus measures to slow inflation.
The yield on the 10-year Bund rose as high as 0.013 per cent on Wednesday, the highest level since May 2019, reflecting a drop in the price of the debt. In mid-December, the Bund yield had registered about minus 0.4 per cent.
The global rise in yields, led by the US, reflects investor angst that policymakers will need to act quickly to cool intense price growth that has taken hold across big economies. Higher than expected UK inflation figures on Wednesday added to the upward pressure on global bond yields.
Underscoring the recent shift in eurozone bond markets, Greece on Wednesday paid the highest borrowing cost on new 10-year debt since March 2019.
“You’ve got expectations of tightening everywhere, so the momentum is in favour of higher yields,” said Andrea Iannelli, investment director at Fidelity International. “The eurozone is no exception to that.”
The German government’s 10-year borrowing rate had been negative for nearly three years, signifying investors were prepared to pay for the privilege of lending their money to Berlin for periods of a decade or more. But the global debt sell-off at the start of 2022 has been enough to drag the euro area’s most important reference rate above zero.
A positive 10-year yield could make the debt more attractive to investors and will have knock-on effects for borrowing costs in other eurozone member states and companies.
“It has come to something when a basis point or two starts to look exciting,” said James Athey, a portfolio manager at Aberdeen Standard Investments, referring to moves of a hundredth of a percentage point. “It underlines how bond investors have really been starved for many years.”
Eurozone inflation climbed to 5 per cent in December, setting a record since the single currency was created more than two decades ago, and raising doubts over how quickly price pressures will ease this year.
At its December meeting, the European Central Bank announced it would continue its asset purchases after its emergency bond-buying programme runs out in March, but at a slower rate than investors had expected.
That, in combination with signs that the US and UK are edging towards tighter policy, has pushed German bond yields higher. Markets are now expecting the Bank of England to raise interest rates three times by August, following Wednesday’s data showing inflation at the highest level in 30 years.
Carsten Brzeski, head of macro research at ING, described the Bund yield’s shift above zero as “symbolically important” because it “reflects a general change in monetary policy in the US but also in the eurozone with central banks entering the exit lane in response to rising inflation”.
Across the Atlantic, the two-year US government bond yield, which is considered to be particularly sensitive to changes in expectations for monetary policy, hit 1 per cent on Tuesday for the first time since February 2020 as markets priced in four rate rises by the Federal Reserve this year.
The sell-off in government debt also pointed to investor confidence that the Omicron coronavirus variant will fail to derail a global economic recovery, potentially giving central banks the opportunity to dial back purchases and raise interest rates.
Markets are now pricing in two 0.1 percentage point interest rate rises from the ECB by the end of the year, despite the central bank’s insistence that higher borrowing costs in 2022 are not consistent with its guidance.
The ECB has committed to maintain “favourable financing conditions” and last year described a rise in eurozone bond yields caused by a spillover from US bond markets as “unwelcome” and pushed back by increasing the pace of its bond purchases.
“The rise in bond yields could worsen financing conditions in the eyes of the ECB and they will clearly look into that,” said Brzeski.
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