Reflation bets push German yield curve to steepest since March

Bets on a rise in inflation that have dominated global bond markets in recent weeks pushed the German yield curve to its steepest since March 2020 on Wednesday.

Bets on a rise in inflation that have dominated global bond markets in recent weeks pushed the German yield curve to its steepest since March 2020 on Wednesday. Expectations of economic recovery from the COVID-19 crisis and extraordinary fiscal stimulus in the United States has pushed global bond yields higher, led by U.S. Treasuries.

With expectations for rising inflation hitting longer-dated bonds harder than shorter ones, yield curves -- often seen as indicators of economic expectations -- have steepened on both sides of the Atlantic. In the euro zone, the gap between two- and 10-year German bond yields, a closely watched segment of the yield curve, rose to its steepest since March 2020 early on Wednesday, at 36 basis points.

Germany's 10-year yield, the euro zone's benchmark, touched its highest since June at -0.331%. By 1049 GMT, it had dipped 1 basis point to -0.36% but was still up 7 bps this week. "The bond market sell-off is developing a dynamic of its own where higher yields lead to higher yields," said Christoph Rieger, head of rates and credit research at Commerzbank in Frankfurt.

"A stronger ZEW or Empire State index just offer more excuses to hedge interest rate risks," he added, referring to data releases a day earlier that both beat expectations. Focus on Wednesday is on U.S. retail sales and the U.S. Federal Reserve's meeting minutes, which will be under scrutiny given the ongoing rates sell-off.

Attention is also on Italy, where Prime Minister Mario Draghi promised sweeping reforms to help rebuild Italy following the coronavirus pandemic, as he set out his priorities before a mandatory confidence vote in his government. The appointment of the former European Central Bank chief, who is expected to more effectively implement economic reports than his predecessors, has boosted investor confidence in Italian government bonds.

Italian bond yields, which rose to near three-week highs in earlier trade at 0.596%, were last unchanged at 0.57% The gap between Italian and German 10-year yields -- effectively the risk premium on Italian debt -- rose to 92 basis points, compared with around 87 basis points last week, which was the lowest since 2015.

In the primary market, Germany raised 1.242 billion euros from the re-opening of a 30-year bond, the first to offer a positive yield in almost a year, according to Commerzbank's Rieger. After rising to positive territory on Feb. 4, 30-year German bonds now yield 0.15%, underperforming shorter-dated bonds given reflation bets.

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