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German bond yields struggle for direction, curve inverts further

Reuters · 11/16/2022 03:46
German bond yields struggle for direction, curve inverts further

By Stefano Rebaudo

- German government bond yields struggled for direction on Wednesday as investors see their current levels fairly pricing the European Central Bank policy tightening path, including a slowdown in 2023.

Markets are cautious after a missile strike in eastern Poland close to the Ukrainian border killed two people.

The missile was probably fired from Russia, U.S. President Joe Biden said on Wednesday after holding talks with leaders of Western allies amid concerns the Ukraine conflict could spill into countries.

Germany's 10-year government bond yield DE10YT=RR, the benchmark of the bloc, rose 0.5 basis points (bps) to 2.1%, after falling 6 bps on Tuesday.

Meanwhile, the German yield curve remained inverted with the gap between 2-year and 10-year yields DE2DE10=RR briefly hitting a fresh 14-year low at -10 bps.

Economists see a curve inversion as a precursor for an economic recession or a signal that central banks will have to ease rates in the medium term since they will soon win their fight against inflation.

Italy’s 10-year government bond yield IT10YT=RR dropped 3.5 bps to 4.02%, with the spread between Italian and German 10-year rates DE10IT10=RR hitting a fresh 4-month low at 191 bps.

Analysts expect developments in U.S. Treasuries to drive euro area borrowing costs before Friday's Targeted Longer-term Refinancing Operations (TLTRO) early repayment announcement and week's Purchasing Managers' Index (PMI) data.

"The market is flagging that we are getting close to the top for official rate hikes, and as we approach that top, typically longer tenor market rates begin an anticipatory move lower," said Padhraic Garvey, rate strategist at ING, referring to U.S. borrowing costs.

The ECB changed the terms on over 2 trillion euros of TLTRO loans to banks to encourage them to repay early, in a move designed to mop up excess cash.

Investors will also closely watch on Thursday the budget announcement by British finance minister Jeremy Hunt, who has warned of "tough but " decisions.

Consumer prices in the UK rose by 11.1% in annual terms last month, the highest reading since October 1981 and a big jump from 10.1% in September.

(Reporting by Stefano Rebaudo Editing by Mark Potter)