Inflation leads the German bond to trade positive after two and a half years



Inflation concerns are responsible for Bund yields, Europe's benchmark debt, climbing back into positive territory after two-and-a-half years. Experts believe that ten-year German bond yields will continue to rise, European issues at the beginning of the year soar and the latest placement has broken the record of 88,000 million euros by governments and companies, due to the expectation of a higher cost of financing. Galloping inflation and a new rise in crude oil prices mean that the yield on German debt, along with that of the rest of the European countries, has been rising for several weeks, counting on the ECB to accelerate the withdrawal of stimuli.

In the wake of the sell-off in US government bonds, German federal bonds are also currently being sold off heavily. For the first time since May 2019, its yield has exceeded 0% this morning, to a maximum of 0.0053%. For comparison, the 10-year US government bond yield rose to 1.8735% on the prospect of the Federal Reserve raising interest rates soon and heading for its strongest rise in more than five years. Market watchers assume it will hit 2% soon. Nowadays a sharp rise in interest rates of 0.5 percentage points in March is considered possible, which would be the first increase of this magnitude in 22 years. Expect that, after a rate hike in March, the sell-off will slow, but there is confidence it will continue, according to Damien McColough, head of bond research at Westpac Banking Corporation. That is why they are so demanded bonds.

Other countries' bonds are also under pressure. Britain's 10-year government bond yield rose to 1.22% from 1.1809% on Tuesday. In December, consumer prices on the island rose 5.4% compared to the same month last year, the national statistics office (ONS) said on Wednesday. It's the biggest increase in 30 years and steeper than analysts expected. The British central bank has already reacted to high inflation and last year raised interest rates for the first time since the outbreak of the pandemic and further increases are now expected in the current year.

In Europe, the increases in profitability are spurred by the tightening of the monetary stimuli that the ECB could advance, several steps behind the US Federal Reserve but that will speed up its pace possibly due to the increase in inflation, which in the US It reaches 7%, the highest rate of increase in four decades. And in Europe it is not far behind. In Germany, it stands today at 5.3% year-on-year, the highest level since 1992, driven by the rise in energy prices, the scarcity of goods and supplies. Energy prices have risen on average by 10.4% in 2021 in Germany, while the supply of goods fell short of meeting demand during the economic recovery, the German Federal Statistical Office confirms. The food prices rose 3.2% and those of services 2.1%.

If the US Federal Reserve carries out its plans, the cost of financing will inevitably become more expensive throughout 2022 in the euro zone, where the ECB will end its extraordinary anti-pandemic plan (PEPP) in March to continue with its purchases (APP). Investors are flocking to German bunds, though it remains unclear whether this move will resemble 2016, when the Bund briefly turned positive. At the beginning of 2019, it embarked on a more lasting trajectory, which led it to settle clearly below zero from May of that year. touched an all-time low at -0.9% in March 2020, when the panic unleashed by the pandemic led investors to seek refuge at any price, and only the ECB's announcement in mid-March of an extraordinary debt purchase program sent the yield to -0.19 %.

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