Euro zone government yields experienced a sharp rise on Monday, leading to the sell-off of global bond markets. This surge in yields caused the 10-year U.S. Treasury note to reach a 16-year high above 5%. The yield on the German 10-year bond increased by 8 basis points to 2.962%, although it remained below the 12-year high of 3.006% seen at the beginning of October. It is important to note that yields rise as prices fall, and vice versa.
The yields on 10-year U.S. Treasuries, which play a crucial role in the global financial system and determine global borrowing costs, reached 5.021%, the highest level since July 2007. While the yield briefly reached 5% last Thursday for the first time in 16 years, it continued to rise significantly on Monday.
On Friday, U.S. and European yields experienced a temporary decrease as investors sought safer assets and sold stocks ahead of the weekend. Investors were concerned about the Israel-Hamas war potentially escalating and affecting the wider Middle East. However, the larger trend in bond markets demonstrates a significant increase in yields as investors assess an American economy that shows no signs of slowing down and growing concerns about rising government debt levels.
Rainer Guntermann, a rates strategist at Commerzbank, highlighted the vulnerability of Bunds and U.S. Treasuries ahead of the European Central Bank (ECB) meeting on Thursday and the Federal Reserve meeting next week. Guntermann explained that Friday’s stabilization in bond markets can be viewed as a precautionary measure against geopolitical risks.
The focus this week in Europe will be on Athens, where the ECB is scheduled to hold a policy meeting on Thursday. Although it is expected that the central bank will maintain rates at 4%, traders will be attentive to any hints regarding the reduction of its bond holdings from the pandemic era.
Greece’s credit rating was upgraded to investment grade by S&P on Friday, making it the first of the “big three” ratings agencies to do so since the country’s debt crisis began in 2010. Currently, Greece’s 10-year government bond yield is 4 basis points higher at 4.402%. Over the past year, the spread between Greece’s 10-year yield and Germany’s 10-year yield has decreased by over one percentage point and has significantly decreased since the euro zone crisis.
Lyn Graham-Taylor, a rates strategist at Rabobank, mentioned that investors had long anticipated this upgrade, so it is unlikely to have a major impact. Graham-Taylor also noted that liquidity in the market is not very strong, which may deter investors from purchasing Greek bonds.
On Friday, S&P affirmed Italy’s investment grade credit rating, two levels above junk, with a stable outlook. Italy’s 10-year yield increased by 5 basis points to 4.972%. However, its spread over Germany’s 10-year yield narrowed to 200 basis points after reaching its widest point since January earlier this month at 209 basis points.
The rise in euro zone government yields has created uncertainty in global bond markets, with investors closely monitoring the situation. The upcoming ECB meeting in Athens and the Federal Reserve meeting next week are expected to provide further insights into the central banks’ strategies and may influence future market developments.
(Reporting by Harry Robertson; Editing by Susan Fenton and Hugh Lawson)
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