Germany’s three-year yield turns positive with Treasury sell-off

FRANKFURT: German bond yields surged to multi-year highs on Friday and the three-year yield turned positive for the first time since 2014, dragged higher by a jump in US Treasury yields.

After falls earlier in the day, bond yields surged at the US session open as US Treasury yields moved as much as eight basis points higher after BofA Securities and Citi revised their calls to expect more aggressive rate hikes from the US Federal Reserve. Moves were smaller in the euro area, but Germany’s 10-year yield, the benchmark for the bloc, rose to as high as 0.581%, the highest since late 2018, and was last up 4 bps by 1424 GMT to 0.56%

The three-year yield turned positive for the first time since 2014 to as high as 0.025% and two-year yields rose to their highest since mid-2015 at -0.14%.

“Markets have jumped upon (the forecasts) consequently selling bonds across the curve and the globe,” said Michael Brown, head of market intelligence at Caxton FX.

“Such a reaction isn’t typical, though, to such outlandish strategist reports, likely suggesting that we are at or very close to peak hawkishness when it comes to market pricing of the global policy outlook.” Germany’s 10-year yield is up 20 bps this week and has risen 35 bps so far in March, setting it up for its biggest monthly jump since 2009. It is also set for the biggest quarterly jump since 1994.

Bond yields, which move inversely to prices, have surged in March given an increased likelihood that central banks will focus on combatting inflation that is expected to remain elevated because of Russia’s invasion of Ukraine. Comments from Fed chairman Jerome Powell on Monday in particular rattled bond markets.

Earlier, German business morale data from the Ifo institute came in far lower than a Reuters poll expected, driven by worsening supply chain issues resulting from high petrol prices and driver shortages The data had little impact on bond markets, following PMI data on Thursday where business optimism came under a severe dent.

A key market gauge of long-term euro zone inflation expectations fell to 2.18% from over 2.20% on Thursday. Germany’s economy minister on Friday said it could take until summer of 2024 for Europe’s largest economy to no longer be reliant on Russian gas.