Germany's 10-year yield drops below 1% as growth fears in focus

GERMANY’S 10-year bond yield fell below the closely watched 1 per cent level on Thursday (May 19) as a slump in US stocks a day earlier brought growth fears back into focus.

European shares were lower, following a sell-off in US equities and a sharp drop in Treasury yields on Wednesday, when retailer Target lost around a quarter of its stock market value, highlighting worries about the US economy given surging prices.

Germany’s 10-year yield, the benchmark for the euro area, was down 6 basis points (bps) to 0.95 per cent by 1150 GMT.

The 2-year yield, sensitive to interest rate expectations, was down 1 bp to 0.36 per cent.

That flattened the 2-year/10-year segment of Germany’s yield curve another 5 bps to 59 bps.

The curve has flattened sharply this week, similar to moves in the US, in another sign of growth concerns.

Investors scaled back their bets on rate hikes from the European Central Bank (ECB) slightly, now expecting around 107 bps of hikes by year-end, compared to 110 bps on Wednesday.

“It’s a catch-up with the decline in equities in the US that carried on post-European market close and the decline in Treasury yields that also carried on,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.

“The interesting dynamic here that shows you the focus on the negative growth side is that you’re actually seeing peripherals widen and some pricing out of the ECB hike expectations ... It shows it’s a growth-led move,” he added.

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Italy’s 10-year yield was 4 bps lower, widening the closely watched risk premium over German bonds to 196 bps, from 192 bps on Wednesday.

Growth concerns also hit corporate bonds, sending Markit’s iTraxx Europe crossover CDS index, which effectively measures the cost of insuring against defaults on a basket of underlying high-yield bonds, to the highest since May 2020 at 493 bps.

The main index, which measures the cost of insuring exposure to investment-grade corporate bonds, rose above 100 bps to the highest since April 2020.

Elsewhere, the three-month Euribor interbank borrowing rate has risen 5.5 bps this week, the biggest weekly jump since the height of market panic over the Covid-19 pandemic in April 2020, which had tightened financial conditions.

Fixed at -0.348 per cent on Thursday, the rate was at its highest since June 2020.

“A rate hike by the ECB at the July meeting is very likely ... This will lift eurozone money market rates, which will rise, due to monetary policy, for the first time since April 2011,” said Luca Cazzulani, head of strategy research at UniCredit.

There was little market reaction to the minutes of the ECB’s April meeting, which showed policymakers expressed widespread concern about the spread of inflation, with some members viewing it as important for the bank to normalise policy without undue delay.

ECB communication has moved rapidly since the meeting, with policymakers calling publicly for a positive policy rate this year and one not ruling out a 50 basis-point rate hike. REUTERS