German short-term yields are the highest since 2008

Short-term German debt yields hit their highest levels since the financial crisis on Friday as investors turned more cautious about rising global interest rates. The most since October 2008, when the collapse of US investment firm Lehman Brothers sparked a global crisis, German two-year rates, which are more sensitive to changes in interest rate forecasts.

The benchmark 10-year yield (DE10YT=RR) rose 5 basis points to 2.533%. Bonds are close to the pessimistic 2.55% yield projection, but Citi strategists under Jamie Searle felt no need to raise it.

The ICE BofA-ML MOVE Index, a measure of investor risk aversion that tracks bond market volatility, is on track for its biggest gain in two weeks since late November. While ‌ is only slightly above its lowest level in almost two years and still about 30% below October’s 32-month high, February is proving to be a challenging month for fixed income.

To be sure, price pressures are easing, according to inflation data from the US to the euro zone, Britain, Canada and Japan. This is giving consumers who are stressed out about cash a breather.

Investors should realize that interest rates may be nearing their peak, but that peak is higher than previously believed and rate decreases will take longer to materialize. But it is proving persistent in less flexible sections of the economy, including the wage and service sectors. Based on what the market is doing, they may be undervaluing it a bit less than it was a few weeks ago.

Rate cut in Germany in 2023

A market-based measure of long-term inflation expectations in the euro zone rose to its highest level on Friday since May a year earlier. The five-year inflation swap, which basically measures where investors think inflation will be in ten years, shot up to above 2.4%, from around 2.3% the previous week.

Money markets indicate that traders anticipate that the ECB will continue raising rates for the Eurozone to around 3.75% by November of this year. In the last two weeks alone, the market has priced in an additional 50bp adjustment.

Fabio Panetta, another board member who ING strategists refer to as a “dove of the bow,” said on Thursday that smaller rate increases would not necessarily result in a lower terminal rate, helping bolster the sell-off in fixed income that day.

The market pricing in the resulting softening was something that we saw more clearly yesterday. It has dropped from about 100bp before the ECB meeting to 80bp from the (now highest) peak in 2023 to the end of 2024,” said Antoine Bouvet of ING.

The result has been severe damage to the debt of the peripheral euro zone. Italian two-year rates have risen this week alone by more than a quarter of a percentage point.

The two-year yield on Italian debt neared its highest level since the summer of 2012, as the euro zone was grappling with a protracted debt crisis that required bailouts for Greece, Portugal and Ireland, as well as broad support for The bench. industry in nations like Spain and Cyprus.

After rising from less than 3% earlier in the month, two-year BTPs rose 13 basis points to 3.554%, while 10-year yields rose 14 basis points to 4.476%.