German bond yields hit year-high in broad sell-off

A sell-off in eurozone government bonds has left German yields at their highest level in a year, challenging investors who have long become accustomed to low inflation and weak economies keeping market interest rates at record low levels.

In France, Germany, Italy, Spain and Austria bond yields have broken through 12-month highs as investors focus on the accelerating pace of inflation, grapple with extra supply and question the longevity of the aggressive central bank stimulus that has dominated fixed-income markets.

While the upward pressure on yields in the US government bond market has captured most attention, eurozone sovereign debts have been steadily creeping higher. Ten-year German Bund yields, the benchmark for eurozone markets, almost touched 50 basis points on Thursday for the first time since January, 2016. Less than a year ago, the yield was a record low of negative 19bp.

Italian bonds were under the heaviest pressure, with the yield on the 10-year bond rising 10bp to 2.2 per cent, their highest level since July 2015, as the prospect of early elections added to concern.

“Important psychological levels have been hit,” said Peter Chatwell, head of European rates strategy at Mizuho Financial Group.

Money has shifted from bonds to stocks since US voters put Donald Trump in the White House, where he has vowed to cut taxes and introduce fiscal stimulus to heat up the US economy.

While ECB president Mario Draghi has pledged to keep central bank stimulus in place this year, a rise in headline inflation in the region is denting the conviction of some that policymakers will be able to.

Eurozone consumer prices rose at the fastest annual rate in more than three years in December, to 1.1 per cent, and data released next week are expected to show that German inflation is now close to 2 per cent.

“This explains why there is a broad retreat in longer-term rates,” Frederik Ducrozet, senior economist at Pictet Asset Management, said of the inflation data.

Eurozone bond investors have been faced with periodic spikes in yields in recent years, most notably a so-called Bund taper tantrum in the spring of 2015, when yields shot more than half a percentage point higher in a matter of weeks. However, the repeated failure of growth and inflation to pick up, as well as an ageing European population with an appetite for safe financial assets, has helped pull yields lower.

And some investors believe the current sell-off is likely to follow a similar pattern. Vincent Mortier, deputy chief investment officer at Amundi, Europe’s largest asset manager, said the ECB could not afford to reduce its support.

This meant Italian bonds (BTPs) could be a buying opportunity. “The ECB will not taper for the foreseeable future,” he said. “When we see spikes [in yields], we’ll buy. We’re not there yet. If BTPs continue to rise, it will be a big opportunity.”