Germany’s 10-yr bond yield near 0%, focus on central banks

MILAN — Germany’s 10-year bond yield briefly touched its highest level since May 2019 on Monday, heading closer to 0% as surging inflation and expectations for U.S. Federal Reserve policy tightening kept global debt markets on edge.

Euro zone bond markets have sold off heavily in recent weeks alongside U.S. Treasuries as investors bet the Federal Reserve could lift interest rates as early as March.

Some Fed policymakers want to move even faster to tighten policy and U.S. jobs data on Friday continued to show a tightening labor market.

On Monday, Germany’s 10-year yield briefly rose to -0.025%, the highest since May 2019, but was last flat at -0.034% by 1552 GMT.

Italy’s 10-year yield also rose to a new high since July 2020 at 1.33% before retreating to trade down 3 bps at 1.29%.

Analysts do not expect Monday’s retracement to interrupt the trend of rising yields.

“Today the big story is Germany’s 10-year yield going toward 0% because of the recent jump in the euro zone inflation and of worries about a more ‘hawkish’ tone from the ECB,” said Althea Spinozzi, fixed income strategist at Saxo Bank.

Data last week showed euro zone December inflation unexpectedly rose to a record high of 5%.

That puts pressure on the European Central Bank, as money markets are currently betting on around 15 bps of rate hikes by December 2022, which is at odds with the bank’s guidance implying no rate hikes this year.

ECB board member Isabel Schnabel said on Saturday rising energy prices may force the ECB to stop “looking through” high inflation and act to temper price growth.

“I think euro zone bond yields would be even higher without fears linked to the Omicron variant,” Spinozzi said.

Market focus will be on a U.S. December inflation reading due on Wednesday, which could create further pressure for the Fed to raise rates as soon as March. A Reuters poll predicts consumer prices rose 7% year-on-year.

According to ING strategist Antoine Bouvet, all recent news flow — central banks and U.S. December payroll numbers – point to higher rates.

“In addition, we are in a very busy period,” he added, referring to the heavy bond supply typical of the beginning of the year, which usually puts upward pressure on yields as investors make room for the new supply.

Spain hired a syndicate of banks to sell a new 10-year bond, according to a lead manager memo seen by Reuters. The sale is expected in the near future, a phrase debt management offices usually use a day before a sale.

(Reporting by Sara Rossi, additional reporting by Yoruk Bahceli; editing by Tomasz Janowski, Susan Fenton and Emelia Sithole-Matarise)