German government bond yields set for biggest fall in a week

German government bond yields set for biggest fall in a week

Oct 14 Reuters - German bond yields were set for their biggest decline in the past two days on Thursday as government debt markets continued to reverse a recent spike in borrowing costs.

Government bond yields across major developed markets, driven up over the last month by worries around inflation and hawkish comments from central banks, have fallen sharply since Tuesday as markets began to consolidate. Bond yields move inversely with prices.

On Thursday in the Euro area, Germany's 10 year yield, the benchmark for the bloc, fell to a one week low of 0.192% and by 1532 GMT it was down 5.6 basis points at - 0.185%, way below Wednesday's near 5 month high of 088%.

Down 8.9 bps over the last two sessions, it was set to reach its biggest two-day drop since March 2.

The 30-year yield was down 12.9 bps in the last two sessions, set for its biggest fall since mid April 2020.

After a sharp move on Wednesday, the yield curve continued to flatten. The gap between five - and 30 - year yields was flattest at 79.70 bps, the last since July to september.

Thursday's yield drop continued to be driven by falling nominal yields on inflation-linked bonds, which outpaced the fall in real bond yields. The real yield of Germany for 10 years was down 6.1 basis points to - 1.879%, the lowest in over a week.

Peter McCallum, rates strategist at Mizuho, noted that moves in the euro area were being driven by developments in the UK government bond market in particular, where investors are betting on a rate hike from the Bank of England by the end of the year, while long-dated yields have fallen sharply.

The moves suggest the market is thinking that would be a policy error, so that would curb growth too much and could not necessarily have the desired impact on inflation. That really would be a hit to demand that isn't warranted, McCallum said.

Investors watch the central bank speakers on Thursday.

In the Euro area, Christine Lagarde said Europe's inflation swing is still seen as temporary and there are no signs yet that the recent surge is becoming embedded in wages.

The Dutch Central Bank chief Klaas Knot said inflation in the bloc could exceed expectations and this outlook for price growth warrants an end to the ECB's emergency bond purchases in March next year.

And given the influence of UK rates on the euro area, the BoE is also in focus. Policymaker Silvana Tenreyro said if it does not raise rates to break the inflation caused by higher energy prices and semiconductors, it could likely cause an explosion in inflation.

Comments from U.S. Federal Reserve policymakers are also under scrutiny after the bank's September meeting minutes showed how it could begin to reduce its bond buying from mid-November.

St. Louis Fed President James Bullard said the current high levels of inflation will not absorb as soon as many U.S. policymakers expect, and again called on the central bank to pursue a faster taper with its bond buying programme.

In the private market, Ireland raised 1.5 billion euros from bonds due 2031, 2045 and 2050.