LONDON/BERLIN: Germany's 10-year borrowing costs rose at a debt auction for the first time since January 2014 on Wednesday, underscoring a rise in global bond yields that has knocked investor confidence in financial assets.
The overall cost to Europe's largest economy of issuing debt has risen by over half a percentage point in a month, evidence of how quickly investors have re-assessed the value and safety of top-rated bonds as inflation and growth prospects tick up.
Europe's five-year, five-year forward rate, the ECB's favoured market measure of inflation expectations, hit a six-month high of 1.86 percent on Tuesday, while data showed the euro economy growing at its fastest rate in two years.
"Clearly in hindsight yields were at amazingly low levels and a correction like this was always going to occur at some point," said Mark Dowding, a portfolio manager at BlueBay.
Yields on German 10-year bonds, the euro zone benchmark, hit a record low of 0.05 percent last month, with many in markets betting they could even turn negative as the European Central Bank launched a scheme to buy over a trillion euros of debt.
But that proved to be the low water mark.
The reasons for the turn in sentiment are unclear. Some point to a pick up in German consumer prices, others to large sovereign issuance in May, but what is clear is that investors got a sudden sense of vertigo and realised rock-bottom yields left them with little protection against losses.
Illustrating the extent of the ensuing move, Germany sold 3 billion euros ($3.4 billion) of 10-year debt at an average yield of 0.65 percent on Wednesday, having issued the same bonds at just 0.13 percent in mid April.
Average yields had fallen at each of the last 15 10-year auctions before Wednesday's sale.
The last time they rose was in January 2014, when Germany issued bonds at 1.77 percent.
Germany is projected to spend 24.9 billion euros on servicing its debt this year, down from 25.9 billion in 2014 and 40.2 billion in 2008.
German yields have plunged in the past seven years, although overall debt levels have risen. OVER YET?
Euro zone bond yields fell in secondary markets after the auctions, a sign of relief that Germany's bonds and the 7 billion euros that Italy issued on Wednesday had been placed with investors.
But strategists said demand was still fairly tepid, a sign that the sell-off in bond markets may have further to run. Investors sought only 1.3 times the amount of German bonds eventually sold to them on Wednesday, down from 1.5 times at the April 15 sale.
"I don't think this auction can be seen as a trigger for going back to the trend of lower yields. It (the sell-off) is probably not over yet," said Jean-Francois Robin, head of strategy at Natixis.
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