Stronger Growth and Inflation Pull European Bond Yields Above Zero
May 13 2021 - 09:53AM
Dow Jones News
By Paul J. Davies
European government bonds sold off sharply in recent days, with
yields following U.S. Treasurys higher and German borrowing costs
hitting their loftiest levels in two years.
Expectations for rising inflation in Europe remain far behind
those in the U.S., but they are rising after a jump in producer
prices this month. A pickup in vaccination rates is also boosting
hopes about a reopening of the region's economies, according to
investors and analysts.
German 10-year yields rose to minus 0.097% on Thursday, up from
minus 0.122% on Wednesday and the first time they have been higher
than minus 0.1% since May 2019, according to Tradeweb.
German government bonds are now the only negative yielding
10-year government bonds in the eurozone after Dutch yields moved
into positive territory on Wednesday.
The rise in European yields this week has been swift, leaving
investors caught out by being too comfortable in their view that
yields wouldn't move, especially among southern European countries,
according to Alberto Gallo, global head of credit strategies at
fund manager Algebris.
"We're not going to see a major selloff, but we are in an
environment where bond yields are not attractive, inflation is
starting to pick up and investor positioning is complacent," he
said.
European inflation expectations as measured by the difference
between 10-year German bond yields and so-called real yields on
inflation-protected bonds were 1.54% on Thursday, according to
Tradeweb, near the highest level for years. U.S. inflation
expectations have risen much faster and higher. The 10-year
so-called break-even rate hit 2.56% on Thursday.
Ralf Preusser, rates strategist at Bank of America, said that
while there had been some positive data on Europe's economic
outlook and some extra supply of longer-dated German bonds, those
things probably weren't the main drivers of the move in yields. He
said European yields were being dragged higher by the moves in U.S.
yields.
"European break-evens have repriced in line with the U.S., which
does suggest the U.S. inflation story plays a role," he said.
The European Commission, the European Union's executive arm,
upgraded its forecast for eurozone economic growth in 2021 on
Wednesday to 4.3% from 3.8% at its last forecast in February.
Despite the increase in yields into positive territory for many
eurozone countries, they remain near historic lows.
Rising yields appear to be driven more by stronger growth
expectations, rather than worry about the European Central Bank
pulling back stimulus. As evidence, the closely watched difference
between Italian and German 10-year yields, a barometer for
financial stress in the region, remains at just 1.12 percentage
points, close to the recent multiyear low.
Eventually, rising inflation would lead the ECB to slow its bond
purchases and even to lift interest rates from negative territory.
One guide to investor expectations for higher rates in the future
is the difference between short-term yields and longer-term yields.
For German debt the spread of 10-year bond yields over two-year
yields has risen to its highest level since May 2019, shortly
before fears of a global slowdown led to a collapse in bond yields
across the U.S. and Europe.
The ECB's next monetary policy meeting in June is expected to
see debate about whether the central bank should slow its bond
purchases as growth rebounds. Any pullback in stimulus could push
yields in southern Europe's more vulnerable economies, such as
Italy, Spain and Portugal, higher.
Mr. Gallo said he thought Italian yields were currently a bit
too close to German yields, leaving them vulnerable to further
rises. However, the ECB should try to keep funding costs low for
Italy, he added.
Write to Paul J. Davies at paul.davies@wsj.com
(END) Dow Jones Newswires
May 13, 2021 09:38 ET (13:38 GMT)
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