On Thursday, Germany’s 10-year bond yield edged closer to positive yield territory, as borrowing rates throughout the euro zone reached record highs in the wake of the US Federal Reserve’s hawkish tone and new signs of growing German inflation.
The 10-year bond yield in Italy was 5 basis points higher on the day, at 1.29 percent, after reaching a high of 1.31 percent in July 2020.
Most major currency bloc 10-year bond rates were up 4 basis points on the day and at or near multi-month highs, mirroring a larger sell-off in global bond markets driven by US Treasuries.
In Germany, the yield on 10-year Bunds, which rolled over into a new benchmark, rose to -0.033% , its highest level since May 2019, according to Refinitiv data.
Analysts said that while the rollover into a new contract made the move in Bund yields appear large, even if measured on a continuous basis, yields were at new multi-month highs.
And trading under the new benchmark puts German 10-year yields within striking distance of 0% – a level it last traded above in May 2019.
Minutes from the Fed’s December meeting, released late on Wednesday, showed that a tight jobs market and high inflation could prompt the U.S. central bank to raise rates sooner than expected and begin reducing its overall asset holdings – a process known as quantitative tightening (QT).
“The discussion about quantitative tightening in the minutes is very significant,” said ING senior rates strategist Antoine Bouvet.
“First and foremost, it shows the magnitude of the Fed’s change of tone as they contemplate a more aggressive balance sheet reduction in parallel to hikes.”
Fed funds futures imply an almost 80% chance of a rate rise to 0.25% at the March Fed meeting, and rates around 0.80% by the end of the year.
A ratcheting up of U.S. rate hike expectations spilled over into European markets.
Money market futures dated to the European Central Bank’s October meeting, showed a 10 bps rate hike was almost fully priced in. They also price in 15 bps worth of tightening by December, versus around 13 bps on Wednesday .
Inflation numbers from European powerhouse economy Germany added to the bearish mood in bond markets.
Consumer price inflation rose in several German states in December, regional data showed on Thursday, pointing to an unexpected increase in the nationwide inflation figure.
Germany’s 10-year inflation-linked bond yield rose to two-month highs and was last up 9 bps on the day at -1.88% .
“There is still a sense that (euro area) inflation could surprise to the upside for longer than expected, so markets have to position for the view that the ECB could capitulate and move earlier on rates,” said Mizuho rates strategist Peter McCallum.
“We think inflation will peak but that could come later in Q1.”