The Business Times

German yields drop from highest in over decade before inflation data

Published Mon, Jan 2, 2023 · 05:19 PM

GERMAN government bond yields dropped from their highest levels in more than a decade in the first trading day of 2023 as investors braced for inflation data amid more hawkish signals from the European Central Bank (ECB).

ECB president Christine Lagarde said that eurozone wages are growing quicker than earlier thought, and the central bank must prevent this from adding to already-high inflation.

Germany’s 10-year government bond yield fell 4.5 basis points (bps) to 2.52 per cent after hitting its highest since 2011 at 2.57 per cent last Friday (Dec 30).

The two-year yield, most sensitive to policy rates, briefly hit a fresh 14-year high at 2.756 per cent before falling by 1.5 bps to 2.71 per cent.

The German consumer price index on Tuesday will kick off the release of national inflation data, which culminates in Friday’s euro area harmonised index of consumer prices (HICP).

“In Spain, HICP inflation which dropped from 6.7 per cent year-on-year in November to 5.8 per cent year-on-year in December (consensus 5.8 per cent, Citi 6.6 per cent), points to potentially large downside surprises,” Citi analysts said.

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“We expect a further decline in headline inflation in December, driven by energy,” they added.

Spanish consumer prices rose in December at their slowest annual pace this year, thanks to lower electricity prices compared to a year ago, flash data showed on Friday.

Italy’s 10-year bond yield dropped 3 bps to 4.65 per cent after hitting on Friday its highest since Oct 24 at 4.70 per cent.

The spread between Italian and German 10-year yields widened slightly to 213.5 bps. It hit its widest since Nov 3 at 222 on Dec 20.

Bond supply is a crucial issue for investors, as governments will increase their spending to fight the adverse impact of the energy crisis.

“The annual net cash requirement should rise to a record high 426 billion euros (S$610.8 billion), from 101 billion euros in 2022 under our base case for quantitative tightening (QT) and is expected to be most non-supportive for bunds,” Citi analysts said.

From March, the ECB will start reducing its five trillion euros’ worth of bond holdings.

Market participants will also brace for the US Federal Open Market Committee meeting’s minutes – due on Wednesday – and US non-farm payrolls data, which will be released on Friday.

Some analysts, who expect US job market strength to eventually cool down, argued that the upcoming data are unlikely to be enough to provide the confidence needed for Fed chair Jerome Powell to enhance rate cuts in 2023. REUTERS

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