German Bund Yield Remains Stable After Significant Weekly Decline
On Monday, the yield on Germany’s 10-year bond, a key benchmark for the Eurozone, held steady. This followed a notable descent the previous week, marking its most substantial drop in nearly three months. This stability comes amid speculation and indicators that may lead to interest rate cuts by major central banks as soon as June.
The 10-year German bund yield was last recorded at 2.268%, showing no change during the day. The previous week saw it decrease by 14.5 basis points, a movement not observed in the preceding 12 weeks.
This plateau in yield levels reflects a global trend, spurred by announcements from leaders of the world’s leading central banks. Both Jerome Powell, Chair of the Federal Reserve, and Christine Lagarde, President of the European Central Bank (ECB), have hinted at the possibility of initiating easing cycles starting June.
“Rate cuts are arriving and that is going to be bullish for the front part of the yield curve,” Althea Spinozzi, the Head of Fixed Income Strategy at Saxo Bank, commented on the expectations of monetary policy easing.
The yield on Germany’s two-year bond, particularly sensitive to shifts in monetary policy, also saw minimal changes, resting at 2.741%. It’s noteworthy that bond yields inversely correlate with their prices.
A mixed bag of U.S. labor market data released last Friday has been fueling discussions around the timing of these anticipated easing measures. Despite the economy adding more jobs than expected, the unemployment rate saw an increase, and the growth in average hourly earnings decelerated. This blend of indicators supports the perspective of initiating rate cuts by summer.
Further insights into the inflation trajectory are awaited, with U.S. inflation numbers due for release on Tuesday expected to reinforce the case for diminishing price pressures. However, with the Federal Reserve entering a blackout period ahead of their March meeting, insights from policymakers will be scant until then.
Meanwhile, in Europe, expectations are tilting towards the ECB introducing rate cuts as early as June, with financial markets pricing in about 100 basis points of easing throughout the year which hypothesizes four quarter-point reductions in 2024.
“The big question bondholders are asking themselves is whether a faster deceleration in inflation might lead the ECB to cut rates in April,” posited Spinozzi, highlighting the speculative nature of current market forecasts.
In other developments, the outcome of Portugal’s recent general election has had neutral effects on its bond market. Despite the center-right Democratic Alliance winning the most seats, the inability to secure a clear majority has left some uncertainty regarding its governance capabilities without the support of other parties. Portugal’s 10-year government bond yield was unchanged at 2.929%, maintaining a steady spread of around 63 basis points over its German counterpart.
“We do not expect the election result to have much market impact after the recent upgrade,” Jens Peter Sørensen of Danske Bank noted, referencing Portugal’s sovereign rating improvement by S&P. This upgrade is anticipated to bolster Portuguese government bonds (PGBs) and potentially positively impact other peripheral Eurozone bonds awaiting rating reviews.
