Recession Fears Push German Yield Curve to Deepest Inversion Since 1992

The spread between the 2-year and 10-year German bund yields has inverted to levels not seen for thirty years. The gap reached -27 bps Thursday, the widest inversion since October 1992. On Friday that spread narrowed somewhat to -20.1 bps. 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.

German Bond Snapshot Nov 25 2022

  • Germany 10Y Government Bond 1.975% yield.
  • 10 Years vs 2 Years bond spread is -20.1 bp.
    Yield Curve is inverted in Long-Term vs Short-Term Maturities.
  • ECB Central Bank Rate is 2.00% (last modification in October 2022).
  • Germany credit rating is AAA, according to Standard & Poor’s agency.
  • Current 5-Years Credit Default Swap quote 7.58 and implied probability of default is 0.13%.

Germany is facing severe head winds with the energy crisis bearing down with inflation pressures. In Europe today Germany’s GDP was revised higher in the second estimate for Q3, but GfK Consumer Confidence disappointed once again.  Yesterday 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.

  • Germany’s Q3 GDP expanded 0.4% qtr/qtr (expected 0.3%; last 0.1%), growing 1.2% yr/yr (expected 1.1%; last 1.7%).
  • December GfK Consumer Climate ticked up to -40.2 from -41.9 (expected -39.6).
  • Germany’s flash November Manufacturing PMI rose to 46.7 from 45.1 (expected 45.0) and flash Services PMI ticked down to 46.4 from 46.5 (expected 46.2).

Typically, 10y bonds pay investors more than 2y to compensate for uncertainty that future holds. The anomaly often precedes a recession.

At this time 25 countries have an inverted yield curve.

Source: WorldGovernmentBonds

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