Hawkish Fed, German inflation brings 10-year foreign bond yields closer to zero percent


London-Germany’s Decade on Thursday, as borrowing costs across the Eurozone hit new highs in the face of hawkish tone from the US Federal Reserve and new signs of high inflation in Germany Bond yields are approaching the positive territory.

Italy’s 10-year bond yield jumped 4 basis points to 1.28% on the day, jumping to nearly 1.32%, the highest level since July 2020.

Most other 10-year Eurozone bond yields rose 3-4 bps on the day, at or near the highest in months, reflecting wide-ranging sellouts in the US Treasury-led bond market.

In Germany, yields on 10-year bonds rolled over to the new benchmark rose to -0.031%, the highest level since May 2019, according to Refinitiv data.

Analysts said the rollover to new contracts showed a big move in the Bund’s yields, while yields were the highest in months, even if measured continuously.

When trading under the new benchmark, the Bund yields are within an amazing distance of 0%. This is the level that was last traded in May 2019.

Minutes of the Fed’s December meeting, released late Wednesday, could indicate that tight job markets and high inflation could cause U.S. central banks to raise interest rates faster than expected and begin to reduce overall wealth holdings. Showed that there is. This is a process known as Quantitative Monetary Tightening (QT). ..

“The debate over quantitative monetary tightening in minutes is very important,” said Antoine Bouvet, senior rate strategist at ING.

“First and foremost, it shows the magnitude of the Fed’s tone changes, which are considering more aggressive balance sheet shrinkage in parallel with rate hikes.”

Federal funds futures mean that interest rates are almost 80% likely to rise to 0.25% at the Fed’s meeting in March.

The sharp rise in US interest rate hikes has spilled over into the European market.

Money market futures, dated to the European Central Bank’s October meeting, showed that the 10 bps rate hike was almost completely priced. It also deserves a tightening of 15 bps by December, compared to about 13 bps on Wednesday.

Inflation rates from Germany, the European powerhouse, have added to the bearish mood of bond markets.

Consumer prices, adjusted to compare with inflation data from other European Union countries (HICP), rose 5.7% year-on-year, following a record 6.0% rise in November, the data show. Germany’s National Consumer Price Index (CPI) rose 5.3% year-on-year, the highest since June 1992.

Germany’s 10-year inflation-indexed bond yield rose to a two-month high, rising 10bps to -1.79% on the day.

Mizuho’s interest rate strategist Peter McCullum said, “The market is still feeling that inflation (in the euro area) can be surprised by higher prices than expected, so the ECB will surrender and raise interest rates early. We must show the view that we can do it. “

“I think inflation will peak, but it could be in the second half of the first quarter.”

By Dhara Ranasinghe

Reuters

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