Strengthening expectations of more eurozone interest rate increases helped send yields on 10-year eurozone government bonds briefly below yields on two-year paper on Thursday for the first time in more than six years.
This unusual “inversion” of the yield curve – a line chart plotting the yields paid out by different bonds against the dates at which they mature – was brief but significant, analysts said. The last time an inversion occurred was in 2000 and prior to that in 1992.
Normally, yield curves slope upwards because investors require a higher yield to compensate them for the greater risk and uncertainty of investing over a longer term.
But on Thursday morning, the yield on the two-year Schatz rose above the 10-year Bund to stand one basis point higher. The curve returned to its more conventional shape soon afterwards and in late trading, the two-year paper was yielding 3.731 per cent and the 10-year bond 3.740 per cent
Analysts say the inversion was prompted by a combination of influences. Investors have been selling short-dated bonds, which have become less attractive to hold, with the European Central Bank increasing interest rates since December last year. The market expects the ECB to raise rates to 3.5 per cent next month.
At the same time, investors have been putting more money into longer-dated debt. Mike Amey, portfolio manager at Pimco Europe, said: “The European markets are caught between two conflicting factors. The ECB is keen on raising interest rates and is keeping a relatively hawkish stance, but there are suggestions that global growth is slowing.”
Marc Ostwald, strategist at Insinger de Beaufort, said: “On the one hand, there is a very hawkish ECB but there also very excessive levels of liquidity along with the colossal mountain of cash which China, Russia and the Opec nations are sitting on, for which there is no home domestically.”
Mr Amey added: “There is a wide range of buyers of longer-dated bonds. Historically, they have been focused on the US markets but some of the heaviest buyers, central banks, seem to be in the game of diversifying their reserves and I am sure European bonds will form part of the buying.”
The UK curve is fully inverted and the US curve, as measured by the gap between two and 10-year yields, has been inverted for most of this year.
