German bonds rally as investors seek refuge after Ukraine invasion

Content of the article

Euro zone bonds rallied on Thursday as investors flocked to safe assets after Russia’s all-out invasion of Ukraine sent European stock markets into a downward spiral.

Germany’s 10-year yield, the eurozone benchmark, fell 10 basis points (bps) to its lowest level since the European Central Bank (ECB) opened the door on Feb. rate hikes this year. Yields move inversely to prices.

The yield was set for the biggest daily decline since the peak of the coronavirus pandemic in March 2020, but gradually pared its losses towards the end of the session.

Advertising

Content of the article

As of 1554 GMT, Germany’s 10-year yield was down about 7 basis points to 0.151%.

Inflation-linked bonds posted the biggest gain, with the German 10-year real yield falling 17 basis points.

Yields on inflation-linked bonds, which investors use to hedge against price increases, fell faster than conventional bond yields this week.

Energy prices have soared in the wake of the crisis in Ukraine, stoking concerns about inflation, already at a record high in the euro zone.

A market gauge of near-term inflation expectations rose sharply on Thursday, while longer-term expectations also hit a five-week high.

“The conflict…takes us a big step towards stagflation where we see higher prices but slower growth. This is a significant continuation of a series of remarkably numerous and unrelated negative supply (chain) shocks,” said Richard McGuire, head of rates strategy at Rabobank.

Advertising

Content of the article

Yields on two-year bonds – sensitive to short-term inflation and interest rate expectations – fell less than on longer-dated bonds. This flattened the two-year/10-year yield curve to its narrowest since Feb. 10, a sign of concern over growth prospects.

The focus was on what the Ukrainian conflict means for the ECB. Prior to the invasion, economists expected the ECB to end its bond purchases by September and an interest rate hike this year in response to record inflation.

Money markets have continued to reduce bets on ECB rate hikes, but still expect hikes of around 34 basis points by the end of the year, compared to around 40 basis points before the end of the year. invasion.

The invasion “increases the conundrum that (central banks) have already wrestled with and capitulated to, namely higher cost-pushing inflation,” Rabobank’s McGuire said.

Advertising

Content of the article

ECB policymakers gathered for an informal meeting on Thursday, announced last week.

In the most cautious statement from a policymaker to date, Greek central bank governor Yannis Stournaras said the ECB should continue to buy bonds until at least the end of the year and the keep open to cushion any fallout from Ukraine, as the economic outlook is “much more uncertain”. .”

Analysts noted that the dispute could prompt the ECB to slow the withdrawal of its stimulus measures.

One of the signs was a weaker than expected reaction from southern European bonds, the main beneficiaries of the ECB’s stimulus measures. In Italy, the closely watched risk premium over German bonds at one point reached 177 basis points, before falling back to 162 basis points.

In credit markets, the cost of insuring exposure to a basket of European high yield corporate bonds has reached its highest level since October 2020. (Reporting by Yoruk Bahceli; Additional reporting by Saikat Chatterjee Edited by Susan Fenton and Mark Potter)

Advertising

comments

Postmedia is committed to maintaining a lively yet civil discussion forum and encourages all readers to share their views on our articles. Comments can take up to an hour to be moderated before appearing on the site. We ask that you keep your comments relevant and respectful. We have enabled email notifications. You will now receive an email if you receive a reply to your comment, if there is an update to a comment thread you follow, or if a user follows you comments. Visit our Community Rules for more information and details on how to adjust your E-mail settings.

Robert D. Coleman