European bond slump continues; German 10-yr yields up to 0.3%

Posted on November 18, 2016

The sell-off in European sovereign debt is showing little signs of easing at the end of a rough week.

Bonds are suffering as fears over rising US inflation have pushed up treasury yields to a 2016 high, with investors anticipating a raft of tax cuts and higher spending from president elect Donald Trump. (Yields rise when a bond’s price falls.)

The Republican’s success also seems to have emboldened populist forces in Europe where three of its four largest economies are holding votes in the next 12 months.

That’s all bad news for bond investors, with yields climbing from the record lows hit in the wake of the UK’s Brexit vote.

Here’s a snapshot of where we stand:

  • Germany’s 10-year Bund yield has climbed to 0.314 per cent, gaining 0.14 percentage points so far this month
  • Italian benchmark debt on course for its worst month since 2012
  • UK 10-year gilt yield is at 1.48 per cent – highest pre-Brexit vote level
  • The Portuguese benchmark yield has soared to 9-month high, eyeing 4 per cent level at 3.8 per cent
  • Spain’s 10-year yield has jumped to post-Brexit vote high of 1.66 per cent – set for worst month since mid-2015

Europe’s bond rout has accelerated despite the European Central Bank hinting it will keep pumping record amounts of stimulus into the eurozone beyond March 2017. ECB president Mario Draghi warned today that inflationary dynamics are still not self-sustaining in the eurozone (read more here).

In a worrying sign for policymakers, higher yields are not a reflection of higher growth rates to come in the single currency area, says Charles Himmelberg at Goldman Sachs.

“Expected market returns are likely to remain low as long as investors remain convinced that the growth outlook is anaemic”, says Mr Himmelberg.

“But many of the fundamental drivers behind the declining trends in developed market GDP growth are likely to stay weak for the foreseeable future”.

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