short-term mo of returns. According to this view, it would be a surprise if the ECB allowed bond yields to rise to where they need to be. Since for example, also the 10-year swap rate is around 0.41%, closer to the implied level of the bonds. However, the two-year yield is still below the benchmark deposit rate. That indifference at the short end of the curve may still continue, given that the ECB is unlikely to raise rates this year, which nicely sets the market up for a steeper curve.
Yields
May 2019 was the last time German 10-year yields were above zero, as the ECB’s dovish policy began to push interest rates lower. The negative returns meant that investors were effectively paying the German government to lend them money, CNBC specialists point out. The thing is that the ECB is currently behind on its normalization path, compared to the Fed and the Bank of England, but rising inflation and broader moves in the global bond market have now contributed to yields exceed the zero level. It is worth remembering that inflation in the eurozone reached a new record in December, which raises more questions about the ECB’s monetary policy. Christine Lagarde’s central bank said last month it would scale back its monthly asset purchases but vowed to continue its unprecedented level of stimulus in 2022.
Tension
It is not uncommon to see in times of financial stress central banks’ policy actions focus on the bond market. Central bankers go out and buy sovereign bonds, lowering their yields, which in turn lowers the cost of borrowing for the government and also lowers interest rates for all kinds of loans and mortgages. So the fact that the benchmark 10-year bund rate returns to positive levels for the first time in almost three years gives German government borrowing costs a boost. It cannot be ignored that year-on-year inflation accelerated towards the end of 2021 and climbed to 5.3%, levels not seen since 1992.
Faro
Meanwhile, US Treasuries continue to adjust to the new reality, and after hitting the 10-year bond – a beacon for most investors – a yield of almost 1.88% closed at 1.85%. at a maximum of two years.
Beyond the different bets it is a fact that the 10-year Treasuries reached 2%, but the liquidation is likely to slow down a bit, some fixed income traders believe. For them, yields will definitely go even higher once the Fed delivers its first hike. However, a prolonged rise in yields could prompt the Fed to move to reassure markets, speculate others who don’t expect the 10-year US bond yield to continue rising beyond 2%, because they argue which is unlikely to be something Janet Yellen’s central bank will tolerate.
Source From: Ambito
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