German government bond yields consolidate after March jump

FRANKFURT: German government bond yields rose on Friday from a sharp fall the previous day, after posting their biggest monthly jump in years in March on expectations of surging inflation and monetary policy tightening.

Some analysts expect Germany’s 10-year yield to stay at around the current levels in the short term, as the downside risks to the economy from the Ukraine conflict will offset the central bank’s commitment to tame inflation.

Russia allowed gas to keep flowing to Europe on Friday despite a deadline for buyers to pay in roubles or be cut off, and peace talks resumed, with Moscow saying it would respond to a Ukrainian offer.

Germany’s 10-year government bond yield rose 3 basis points (bps) to 0.581% after falling 11 bps the day before.

German 10-year yields staged, in March, its biggest monthly rise since 2009, up 39 bps.

“We think the bund yield has reached a peak (around 0.75% in the previous days) and could settle around 0.50%-0.60% for some time,” Yannick Lopez, head of fixed income at OFI Asset Management, said.

Italy’s 10-year yield was up 7.5 bps at 2.119%.

“The risk of a meaningful deterioration in the growth outlook materializing in the near future is rather low, which limits the possibility of the recent downward move in government bond yields becoming sustained,” Unicredit analysts said.

US job growth continued at a brisk pace in March, with the unemployment rate falling to a new two-year low of 3.6% and wages re-accelerating, positioning the Federal Reserve to raise interest rates by a hefty 50 basis points in May.

Euro zone inflation surged to 7.5% in March, far beyond expectations of 6.6%, hitting another record high with months still left before it is set to peak.

ING sees upside potential for (US) market rates as far as the 2.75% area, “particularly as the Federal Reserve has not even started to unwind its balance sheet.” France’s government bond yields have priced in an Emmanuel Macron win at the upcoming presidential election on April 10, as the spread between French and German 10-year yields tightened recently. It was around 46 bps on Friday.

Macron is set to win the run-off of the French general election with 54.5% of votes against the far-right leader Marine Le Pen, pollsters said on Friday. “This creates asymmetric risks ahead amid tightening poll support versus (Marine) Le Pen, with 40% of voters still undecided,” Citi analysts wrote in a note to clients.