4 Oct 2023
In sync with global bond markets, German bond yields are experiencing a significant surge, marking a noteworthy milestone. The 10-year German yield has ascended to a remarkable 3%, a level not witnessed since 2011.
This notable surge is primarily rooted in the rise of real yields, clearly depicted by the yellow line on the charts. Interestingly, inflation expectations, measured by the breakeven rate, have remained steadfast since the beginning of 2023, with the 10-year German breakeven rate holding firm at 2.29%.
Despite the enduring challenges in Europe's economic outlook, there have been noticeable improvements, albeit against the backdrop of economic strain. Over the summer, the Citi Economic Surprise Index for Europe has impressively rebounded, transitioning from a daunting -150 to a more manageable -50. This reflects positive developments amid the ongoing challenges.
However, the persistent turbulence in the government bond market can be attributed to several factors. These include the synchronized reduction of balance sheets by most developed central banks, which directly impacts real interest rates and term premiums. Additionally, the narrative of "higher for longer" has prompted a recalibration of flows into the front end of the yield curve, driven by concerns about the long end's convexity potentially not performing well in this scenario.
The current resilience of the US economy, coupled with uncertainties surrounding the potential for a second phase of rising inflation within a soft landing scenario and a larger fiscal deficit, adds further complexity to this landscape.
Source : Bloomberg
