German yields steady, Italian-German spread hits 8-1/2 month low


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Jan 13 (Reuters) –

German borrowing costs were little changed on Friday, while yield spreads between core and peripheral bonds kept tightening as markets weigh the bloc’s growth outlook and the impact on monetary tightening.

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Germany’s 10-year yield was steady at 2.132%. On Thursday, it spent most of the session at its lowest levels in four weeks before hitting a day’s low at 2.06% after

U.S. inflation data


The German economy likely stagnated in the final quarter of last year and grew by 1.9% over the full year 2022, the Federal Statistics Office said on Friday, suggesting Europe’s largest economy may escape a recession over the winter.

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Italy’s 10-year government bond yield fell 3.5 basis points (bps) to 3.963%, with the closely watched spread between Italian and German 10-year bond yields hitting its lowest since April 28 at 175.5 bps.

Some investors recently reckoned that more enticing yields and a European Central Bank backstop could rein in the

risk premium

for Southern European debt.

Analysts said a bleak economic outlook in the bloc might slow down monetary tightening, even though European Central Bank officials had reiterated they would raise interest rates to fight inflation even in a recession.

“It’s a sort of tug of war with the financial markets, which bet that weak economic data and peaking inflation can force a policy easing,” said Massimiliano Maxia, senior fixed-income specialist at Allianz Global Investors.

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“It’s difficult to say who’s right, but we are still slightly underweight on duration,” he added.

Greek central bank chief Yannis Stournaras said on Thursday the ECB would continue raising interest rates until there was certainty that inflation was de-escalating towards the 2% target over the medium term.

ECB policymaker Martins Kazaks is pushing back on investor bets that the ECB will cut interest rates by the end of this year, saying it would take a deep recession for borrowing costs to be lowered.

Forwards on the ECB euro short-term rate (ESTR) peaked in August 2023 at 3.3%, while pricing in a policy rate at 3.2% in December 2023 and at 2.8% in May 2024.

Analysts have warned that the recent rally in bond markets may have gone too far, with Germany’s 10-year yield down over 40 bps in 2023, after hitting its highest since 2011 of 2.569% in late December.

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“The war and Russia weaponizing gas supply is so important here; there is the potential for another energy crisis later this year,” said Eoin Walsh, partner and portfolio manager at TwentyFour Asset Management.

“Economic data has indeed been better recently, but we think the market needs to be careful and can’t be complacent.”

Meanwhile, headlines about German proposals for more joint EU debt fit the picture, this has been “probably more of an excuse to cover shorts in the periphery,” Christoph Rieger, head of rates and credit research at Commerzbank, said.

Media reports this week said that German Social Democrats would call for the European Union to create new joint financing instruments to help member states compete against increased U.S. subsidies for green technology. (Reporting by Stefano Rebaudo, additional reporting by Samuel Indyk; editing by Bradley Perrett, Sharon Singleton, Nick Macfie and Ed Osmond)



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