German 10-year rate falls below 2%

At the end of September, the yield on 10-year German government bonds exceeded 3%. A month and a half later, it fell just under 2% for the first time in more than a year. The 10-year Bund yield fell 5 basis points (bp) to 1.97% on Wednesday, while the real rate returned to near zero with inflation expectations falling to 2%.

Prospects for a slowdown in growth in the eurozone, but above all new data confirming a trend towards disinflation, reinforce expectations of a rate cut by the European Central Bank (ECB) in 2024, which will be reflected in average rates and vice versa in the long term.

UK inflation fell sharply last month to 3.9% from 4.6%, after Tuesday’s confirmation of euro zone annual inflation in November at 2.4%, compared with 2.9% in October, the lowest since July 2021 in the previous month. , announced on Wednesday, adds to expectations for monetary policy easing next year.

Contrary to last week’s ECB message, the market now expects six 25bp cuts in 2024 (-160bp total) with a 50% chance of the first easing since March. Several ECB members have judged these expectations to be too aggressive in recent days, as they believe victory over inflation has not yet been achieved.

Producer prices also fell more than expected in November in Germany (-7.9% year-on-year, after -11% in October and -0.5% in one month, according to data released Wednesday by Destatis), mainly due to a sharp decline energy. prices.

Strong relaxation

The yield on the 10-year Bund fell nearly 50 bps in December alone, the biggest monthly drop in nearly a year and a half.

Shorter maturity periods have also become available. The two-year German government bond yield fell 5 bp to 2.46%. In the medium term, the 5-year rate is reduced by 5 bp to 1.94%.

The 10-year OAT yield also fell 5 bp to 2.48%. The price of Italian construction with the same maturity fell by 4 bb to 3.58%. The spread between German and Italian debt is the tightest since last June, at 165 bp.

A sharp fall in UK inflation is also supporting the prospect of a rate cut by the central bank, while long-term rates are falling sharply. They bounced back last week after a particularly dovish tone from the Bank of England. The yield on the British government’s Gilt bond fell 12 basis points to 3.51% on Wednesday, the lowest since April. The two-year yield fell 17 bp to 4.06%.

Some observers note that it is currently difficult to counter expectations of lower rates from central banks given the low liquidity in the market, but that a reversal of this trend could occur at the beginning of the year.

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