LONDON: The euro zone government bond market on Friday delivered the clearest sign yet that Germany, the region’s largest economy, could be on the verge of a recession, as short-dated yields rose sharply.
Global bond yields plummeted on Thursday after data showed US consumer inflation rose by much less than expected last month, which could offer the Federal Reserve some room to slow down the pace at which it plans to raise interest rates.
In Europe, data on Friday showed harmonised inflation in Germany, the euro zone’s biggest economy, rose at a rate of 11.6% in October, its highest since reunification in 1990, due in large part to spiralling food and energy costs. Separate reports this week have forecast a steep drop in consumer spending.
Yields on the benchmark 10-year Bund rose by 15 basis points (bps), their largest one-day rise since late September, to trade around 2.153%. Those on the two-year Schatz rose as much as 17 bps to a high of 2.15%, briefly pushing above those for 10-year debt. This inversion can often herald the onset of a recession.
“There is a widening acceptance that we’re going to be seeing Germany in particular, but also the euro zone heading into recession in the first quarter of next year,” StoneX strategist Fiona Cincotta said. “All the signals are out there,” she said.
The gap between two- and 10-year yields has only inverted on a handful of occasions in the last 20 years and only ever by a fraction, with the exception of the run-up to the financial crisis in 2008, when it turned negative by as much as 23 bps.
It traded as low as -1 basis point earlier in the day and was last in positive territory again, but only by 1.3 bps.
The European Central Bank raised rates earlier this month and flagged the risk that a prolonged period of high inflation posed to the economy. A raft of ECB policymakers this week have repeated the need for the central bank to control price pressures by tightening monetary policy, which has been ultra-loose for at least a decade.
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