German government bond yields hit fresh multi-year highs

GERMANY’S government bond yields rose to fresh multi-year highs on Thursday (Oct 20) after a selloff in US Treasuries overnight while investors assessed the impact of possible new tightening measures at next week’s European Central Bank (ECB) policy meeting.

According to a Reuters poll, the ECB will increase deposit and refinancing rates by 75 basis points (bps), but analysts are focused on comments on quantitative tightening and possible changes in rules of long-term refinancing operations (TLTRO).

A selloff in US government bonds resumed on Wednesday, pushing the benchmark 10-year Treasury yield to its highest level since mid-2008. The 10-year yield rose 5 bps to 4.18 per cent in early London trade.

Germany’s 10-year bond yield rose 8.5 basis points (bps) to its highest since August 2011 at 2.453 per cent, while the two-year yield was up 8 bps to its highest since December 2008 of 2.158 per cent.

“I expect rates to stay around their multi-year highs as the anticipated changes in TLTRO (targeted longer-term refinancing operations) rules and possible hints of quantitative tightening might trigger a new repricing of the ECB monetary outlook,” said Francesco Maria Di Bella, rate strategist at UniCredit.

“There’s a lot at stake next Thursday.”

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ECB policymakers are closing in on a deal to change rules governing trillions of euros worth of bank loans.

“A 75bp rate hike looks like a done deal, and the reinstatement of a tiering multiplier (aimed to change TLTRO rules) could be the first answer to tackle excess liquidity,” ING analysts said in a research note. “The ECB can simply not get enough of hiking rates aggressively.”

Recent inflation data boosted expectations that central banks will keep their hawkish rhetoric.

The most significant jump in food prices since 1980 pushed British inflation back into double digits last month, while eurozone data showed the rise in consumer prices was still at a record high.

Investors will also focus on gilt as the Bank of England (BOE) confirmed it would start reducing its gilt holdings from Nov 1, even if they are showing declining volatility after the U-turn on the government economic plan earlier this week.

“Since the beginning of this week, the impact of gilts has been subsiding, and people have started shifting their focus to next week’s ECB policy meeting,” Unicredit’s Di Bella added.

Yields in UK 10-year gilts rose 10 bps to 3.98 per cent. REUTERS