German 10-Year Bunds at Weakest Level since July 2011 as Yield Curve Inversion Deepens

Germany’s benchmark 10-year Bund yield closed Friday just off its weakest level since July 2011. Yields pulled back, mimicking the move in US Treasuries, to 2.688% after touching 2.77% yesterday, which was the highest-level yield since July 2011. The level is major support, (-2/8 Murrey Math). The 10 Years vs 2 Years bond spread is -51.4 bp. We have come a long way from about -0.1% at the beginning of 2022. Bond traders on Friday weighed dovish comments by the Federal Reserve’s Bostic against the European Central Bank’s hawkish stance. ECB board member Madis Müller made the case for further ECB rate hikes on Friday, while ECB vice president Luis de Guindos warned of persistent inflation. 

Bund Hits Lower Price Since 2011

Germany continues to face severe head winds from the energy and food crisis bearing down with inflation pressures. The ECB is aggressively raising rates. Yields have been also supported by expectations of increasing government funding and falling excess liquidity, as Germany’s government boosts public spending to fight the adverse impact of the energy crisis.

ECB President Christine Lagarde spoke in favor of a 50 bps March rate hike again, adding that subsequent increases will depend on incoming data on Thursday. Policymaker Joachim Nagel said the central bank might need significant rate hikes beyond March and should accelerate the rundown of its oversized bond portfolio. ECB policymaker Villeroy de Galhau said that it is desirable to reach the terminal rate by the summer and that growth in France is expected to be slightly positive in 2023.

The move on Thursday was spiked by inflation data showing the EU bloc’s inflation eased less than forecast to 8.5% in February, while the core rate hit a new peak.

  • Eurozone’s Core CPI accelerated again in the February reading.
  • Eurozone’s February CPI 0.8% m/m (last -0.2%); 8.5% yr/yr (expected 8.2%; last 8.6%).
  • Eurozone’s February Core CPI 0.8% m/m (last -0.8%); 5.6% yr/yr (expected 5.3%; last 5.3%).
  • January Unemployment Rate 6.7% (expected 6.6%; last 6.7%)
  • France’s January government budget deficit EUR21.20 bln (last deficit of EUR151.50 bln)
  • Italy’s January Unemployment Rate 7.9% (expected 7.8%; last 7.8%).
  • Italy’s February CPI 0.3% m/m (expected 1.4%; last 0.1%); 9.2% yr/yr (expected 8.8%; last 10.0%)

Last year at one point the spread between the 2-year and 10-year German bund yields inverted to levels not seen for thirty years. The gap reached -27 bps, the widest inversion since October 1992. The 10 Years vs 2 Years bond spread is now -51.4 bp. An inverted yield curve is an interest rate environment in which long-term bonds have a lower yield than short-term ones and often considered a predictor of economic recession.

The European Central Bank pledged further rate hikes to fight inflation and announced it would start reducing its €5 trillion bond holdings from March, with President Lagarde saying the central bank would need to deliver “significant” rate increases at a steady pace.

Major Benchmark 10-year Bond markets Close 2022

In the US the Fed said it would continue its monetary policy tightening campaign, even if data points to a weakening economy, while the Bank of Japan said it would loosen some of its strict controls over long-term interest rates.

Source: TC

From Th TradersCommunity Research Desk