German real yield hits record low as traders grapple with Ukraine

© Reuters. FILE PHOTO: The euro sign is photographed in front of the former headquarters of the European Central Bank in Frankfurt, Germany, April 9, 2019. Picture is taken on slow shutter speed while the camera was moved. REUTERS/Kai Pfaffenbach

By Yoruk Bahceli

(Reuters) -Germany’s “real” yield hit a record low on Wednesday even as euro zone yields generally recovered from a plunge a day earlier as traders bet on slower European Central Bank rate hikes amid the economic fallout from Russia’s invasion of Ukraine.

Euro zone money markets are now pricing in around 20 basis points (bps) of rate hikes from the European Central Bank by December with a first 10 bps move by October.

That represents a dramatic repricing as markets were betting on 30 bps of hikes by December at the start of the week and 40 bps before the invasion started last week and when all focus was on steps the ECB needed to take to curb record high inflation.

Now, several policymakers argue the bank should tread more cautiously given the uncertainty stemming from the conflict.

The scale of the repricing led to Germany’s 10-year yield, the benchmark for the bloc, recording its biggest daily fall since 2011 on Tuesday. Bond yields move inversely with prices.

On Wednesday, markets moved to unwind part of those moves and Germany’s 10-year yield rose back above zero. By 1553 GMT it was up 8 bps at 0.009%. Italy’s 10-year yield, which dropped over 30 bps on Tuesday, rose 18 bps to 1.574%.

That widened the closely watched risk premium Italian bonds pay over German debt to 155.6 bps after it narrowed to 145 on Tuesday, as Italian debt, among the biggest beneficiaries of ECB stimulus, had outperformed.

Piet Christiansen, chief analyst at Danske Bank, said the scale of the moves on Tuesday and Wednesday were a sign of “very nervous markets”.

“We should be very careful about … any particular (market) views in this environment.”


Analysts said that Tuesday’s action indicated a large-scale reversal of short-positioning on the bloc’s bonds – essentially bets that yields would rise further. Those had surged after the ECB opened the door to rate hikes this year on Feb 3.

Energy prices rose further on Wednesday, exacerbating market concern around inflation and a growth hit resulting from the conflict.

Germany’s 10-year inflation-linked bond yield, its “real” yield as it strips out anticipated inflation, fell to a record low at -2.239%. It later recovered and was last at -2.144%.

A key market gauge of long-term euro zone inflation expectations rose above 2% – the ECB’s inflation target – for the first time since October.

Euro zone inflation exceeded expectations and rose to a record 5.8% in February, but this had little impact as the ECB is expected to look through the additional rise given the economic uncertainty.

“Central banks generally don’t respond to the direct impact of supply shocks, but only to second-round effects,” Anders Svendsen and Tuuli Koivu at Nordea told clients.

“An upside supply shock hurts the economy and thus risks lowering wage growth and inflation in the medium term.”

Just over 50% of the bloc’s government bonds yielded below 0% by the end of Tuesday, Tradeweb said, up from 40% at the end of Monday.

German real yield hits record low as traders grapple with Ukraine

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