Euro zone yields rise, German curve close to deepest inversion since 2008

Stefano Rebaudo
·2 min read

By Stefano Rebaudo

Nov 23 (Reuters) - Euro zone borrowing costs edged up with the German yield curve close to its deepest inversion in almost 14-1/2 years, as investors closely watched Purchasing Managers' Index (PMI) data which might affect monetary tightening expectations.

France's private sector economy contracted in November for the first time since February 2021.

The downturn in German economic activity eased in November, a PMI preliminary survey showed on Wednesday.

Germany's 10-year government bond yield, the bloc's benchmark, was up 4.5 basis points (bps) at 2.03%. It hit its lowest since October 5 at 1.949% last week.

The gap between 10-year and 2-year yields was at -14.5 bps after briefly hitting its lowest since June 2008 in early trade at -17.5 bps.

"Considering ECB officials are still leaning on the hawkish side, we see a case for weak PMIs putting additional flattening pressure on the curve, leading to a deeper inversion of the 2/10Y spread," Unicredit analysts said in a note to clients.

The European Central Bank (ECB) still has a long way ahead of it on rate hikes, the head of Germany's Ifo economic institute told Reuters on Tuesday.

ECB hawks and doves sent mixed signals on Tuesday, with Bundesbank President Joachim Nagel opening the door to smaller interest rate increases coupled with a longer tightening path.

Italy's 10-year bond yield rose 4 bps to 3.96%, with the spread between Italian and German 10-year yields at 192 bps.

Investors will also watch U.S. Treasuries before the release of minutes from the Nov. 1-2 Federal Reserve policy meeting, due late on Wednesday.

U.S. borrowing costs eased on Tuesday amid thin trading and lingering concerns over more COVID-19 infections in China, with investors waiting for clues on the outlook for inflation and monetary policy from Fed minutes.

Analysts said minutes from the Federal Open Market Committee (FOMC) might provide insights about expectations for a slower pace of hikes but a potentially higher terminal rate.

They also flagged the meeting was before the soft inflation data released on Nov. 10. However, minutes might show some building differences between officials who favour a wait-and-see approach and those who present a view that financial conditions will need to tighten further. (Reporting by Stefano Rebaudo; Editing by Toby Chopra)