Updated December 20th, 2023 at 21:56 IST
German 10-year yield drops below 2% as bond rally continues
The reason behind the yield slide is slowing inflation in most major markets.
Witnessing a further fall on Wednesday on expectations of rate cuts next year, Euro zone government bond yields, with Germany's 10-year yield dropped below 2 per cent for the first time since March and the gap between Germany and Italy's 10-year yields hitting its narrowest since late June.
The 10-year yield of Germany fell 3 basis points (bps) to 1.989 per cent. That left the euro zone benchmark down 46 basis points in December so far, which if maintained would be its biggest monthly fall in nearly a year and a half. The reason behind the fall is slowing inflation in most major markets, supporting expectations that central banks will be cutting interest rates significantly next year.
Data from Britian revealed that consumer inflation plunged to 3.9 per cent from 4.6 per cent in October, its lowest reading in two years, causing gilt yields to fall sharply with the 10-year down 10 basis points at 3.554 per cent. "The disinflationary process is more advanced than many thought across developed economies, catching markets by surprise," Kenneth Broux, senior strategist FX and rates at Societe Generale, said. Markets are now pricing in more than 150 basis points of interest rate cuts from the European Central Bank in 2024, a small increase on Wednesday, which analysts at Rabobank said was prompted by weaker than expected UK inflation data. The 10-year yield in India was last down 2 bps at 3.627 per cent. It is down more than 60 bps this month, which would be its biggest monthly fall since 2013.The recent large fall in Italian yields has helped further narrow the gap between Germany and Italy's 10-year government bond yields, to 157 basis points in early trading, its tightest since June.
Two of the European Central Bank's more hawkish officials on Wednesday tried to push back against those rate-cut expectations. Bundesbank President Joachim Nagel and his Dutch colleague Klaas Knot both said it was too early to declare victory against inflation. "I would say to everyone who is speculating on an imminent interest rate cut: be careful, some people have already miscalculated that," Nagel said.The drop in UK inflation took precedence, however, with shorter dated bonds also rallying. Germany's two-year yield was last down 3 bps at 2.484 per cent, and the Italian equivalent down 3 bps at 3.035 per cent.
(With Reuters inputs)
Published December 20th, 2023 at 21:56 IST