The outgoing Finance Minister and new German Chancellor Minister Olaf Scholz delivers a speech during the handing-over ceremony with his successor in the German Federal Ministry of Finances in Berlin, Germany, December 9, 2021. Tobias Schwarz | Reuters
Borrowing costs for the German government continued their push higher on Wednesday, with the benchmark 10-year bund yield trading in positive territory for the first time in nearly three years.
May 2019 was the last time that German 10-year yields were above zero, when accommodative policy from the European Central Bank started to pressure interest rates lower. Negative yields meant that investors were effectively paying the German government to lend it money.
The ECB is currently behind on its normalization path, compared to the Federal Reserve and the Bank of England, but surging inflation and wider moves in the global bond market have now helped to push yields above zero.
Euro zone inflation hit a new record high in December, raising more questions about the ECB’s monetary policy. The central bank said last month that it would be cutting its monthly asset purchases, but vowed to continue its unprecedented level of stimulus in 2022.
Central bank policy in times of financial stress usually focuses on the bond market. The central banks buy up sovereign bonds, reducing their yields, which then lowers the cost of borrowing for the government and also lowers interest rates for all sorts of loans and mortgages.
But the bounceback from the coronavirus pandemic has seen consumer prices soar amid this easy policy. And now central banks are looking to unwind their stimulus to try to cool down inflation. The Bank of England has already hiked rates by 15 basis points.
Commenting on yields, James Athey, senior investment manager at Aberdeen Standard Investments, told CNBC Wednesday that the market currently had the “bit between it’s teeth.”
“Bonds yields everywhere are in the crosshairs. It’s very much not being led by Europe ... I don’t think we are looking at a Eurocentric repricing here. It’s more of just the usual correlation we see between government bond markets and the big move higher we’re seeing in Treasury yields,” he said.
Surging energy prices have played their part in pushing inflation higher, as well as supply bottlenecks in products like semiconductors. These factors have also had a knock-on effect for Germany’s GDP figures.
The German economy grew by 2.7% in 2021. But the country’s statistics office said that growth was still 2% lower in 2021 than in 2019, showing that the economy has not yet returned to pre-Covid levels.
In the second half of 2021, signs emerged that the German economy could be hit by supply chain issues. In October, the country’s leading research institutes slashed their forecasts for growth in 2021 to 2.4%. The German government also lowered its expectations for annual growth in 2021.
At 8 a.m. U.K. time, the 10-year German bond yield was up 3 basis points for the session, at 0.014%.