German real yields set for biggest monthly fall in July

German government bond yields were set to record their biggest monthly fall since January 2020 and inflation-linked bond yields their largest in nine years on Friday as concerns around the COVID-19 Delta variant and economic growth fed into a big global bond rally.

German government bond yields were set to record their biggest monthly fall since January 2020 and inflation-linked bond yields their largest in nine years on Friday as concerns around the COVID-19 Delta variant and economic growth fed into a big global bond rally. Fears that economic growth is peaking and may not be as strong as expected have driven bond yields sharply lower across the world in July. The rally fed on itself as investors caught on the wrong side of the trade scrambled to get back in.

The yield on Germany's 10-year bond, the benchmark for the euro area, fell nearly 25 basis points in July, setting it for its biggest monthly decline, or best performance, since January 2020, before the pandemic spread globally and rattled markets. Bond yields move inversely with prices. Its 10-year inflation-linked bond yield dropped more than 30 bps in July, the biggest fall since July 2012, the height of the eurozone debt crisis when the then ECB-president Mario Draghi promised to do "whatever it takes" to maintain the single currency.

Elsewhere in the eurozone, Italy's 10-year yield was set for its steepest fall since September last year. The European Central Bank's decision in early July to adopt asymmetrically, 2% inflation target has also supported the bloc's debt market. The move means interest rates will be kept at record low levels for longer, temporarily allowing an inflation overshoot.

That has largely been seen as implying that low rates and bond-buying will be upheld for the foreseeable future. "[Current ECB President Christine] Lagarde didn't have such kind of wording but the result is the same," said Pascal Perrone, portfolio manager at Eric Sturdza Investments.

German bonds -- both nominal and inflation-linked -- have also outperformed U.S. Treasuries, which initially drove July's bond rally. "For the Bunds... they were a bit delayed in their response compared to the U.S... The economic data were topping up in the U.S. before the eurozone, so, normally, this adaptation was a bit later in the eurozone," said Patrick Krizan, senior economist at Allianz.

More broadly, the bloc's bonds were steady on Friday with most 10-year yields ranging from unchanged to one basis point higher by 1113 GMT. The euro area economy grew faster than expected in the second quarter, pulling out of a COVID-19 recession as curbs to stop the contagion were eased, while inflation shot past the European Central Bank's 2% target in July.

But Bert Colijn, ING senior eurozone economist, said Lagarde had made it very clear that the ECB would not act on temporary inflation. "This release didn’t provide much evidence of more structural inflation as core inflation fell back from 0.9% to 0.7%", he added, referring to a narrower inflation measure the ECB tracks which excludes volatile food and energy costs.

Still, on Friday, a key gauge of long-term eurozone inflation expectations extended its rise above 1.70% for the first time since late 2018.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)