Germany’s benchmark 10-year Bund yield closed 2022 at 2.5% at the end of 2022, close to its highest level since July of 2011, and up from about -0.1% at the beginning of the year. Bunds being the inverse, closed at the weakest since then. Germany is facing severe head winds with the energy crisis bearing down with inflation pressures. However, 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.
Germany’s GDP GfK Consumer Confidence disappointed and Germany’s flash November Manufacturing PMI rose to 46.7 from 45.1 but flash Services PMI were down to 46.4 from 46.5. There are fears of a severe global recession as major central banks are set to tighten monetary policy further in 2023.
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. 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.
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.
From Th TradersCommunity Research Desk