# German real yields fall to new record lows on stagflation fears Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-03-07 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Euro Zone Bond Yields Hit Record Lows Amid Stagflation Fears Meta Description: Surging inflation expectations and possible sanctions drive bond yields to new lows, with rising fears of stagflation. Markets see risks of inflation and URL: https://financedigest.com/german-real-yields-fall-to-new-record-lows-on-stagflation-fearshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-03-07t085937z1lynxmpei260ckrtroptp4eurozone-bonds-1736815991633-compressed.jpg) By Stefano Rebaudo MILAN (Reuters) -Surging inflation expectations triggered by possible sanctions on Russian oil drove euro zone real government bond yields to fresh record lows on Monday, amid rising fears of a stagflationary shock for the European economy. Brent crude prices soared to their highest levels since 2008 after the United States and European allies weighed a Russian oil import ban and delays in the potential return of Iranian crude to global markets. Markets are [pricing in risks of surging inflation](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc.html "UK shop price inflation hits record 8% in January: BRC"), triggered by energy prices, coupled with an adverse impact on economic growth; they basically see stagflation risks,” Annalisa Piazza, fixed income research analyst at MFS Investment Management, said. Germany’s 10-year and 30-year inflation-linked government [bond yields](https://www.financedigest.com/wall-st-stocks-fall-bond-yields-rise-as-china-drops-quarantine-rule.html "Wall St stocks fall, bond yields rise as China drops quarantine rule") fell as much as about 16 basis points (bps), hitting new record lows of -2.531% and -2.407%, while inflation expectations surged. They were down around 8.5 bps by 1441 GMT. Germany’s 10-year breakeven [inflation rate](https://www.financedigest.com/german-inflation-rate-to-ease-over-course-of-2023-econ-minister.html "German inflation rate to ease over course of 2023 – econ minister") rose to its highest since April 2011 at 2.299%. A key market gauge of long-term euro zone [inflation expectations rose to its highest level since January](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc-2.html "UK shop price inflation hits record 8% in January: BRC") 2014 at 2.309%. Meanwhile, the German 10-year nominal yield staged a rebound after falling sharply last week, when it recorded its biggest fall since November 2011 as markets [scaled back](https://www.financedigest.com/mifid-ii-why-you-should-not-scale-back-your-implementation-efforts.html "MIFID II: WHY YOU SHOULD NOT SCALE BACK YOUR IMPLEMENTATION EFFORTS") bets on monetary tightening on concerns about the war in Ukraine. It was up 7.5 bps at -0.026%, after tracking moves in U.S. Treasuries. U.S. 10-year [Treasury yield](https://www.financedigest.com/wall-st-flutters-treasury-yields-ease-as-powell-resumes-testimony.html "Wall St flutters, Treasury yields ease as Powell resumes testimony") rose 6 bps to 1.782%. Analysts still have mixed views about how the [central bank](https://www.financedigest.com/dollar-skulks-at-eight-month-low-central-bank-meetings-in-focus.html "Dollar skulks at eight-month low, central bank meetings in focus") will respond to the likely economic impact of the conflict. The 10 March [ECB meeting](https://www.financedigest.com/sterling-steadies-vs-dollar-ahead-of-boe-ecb-meetings.html "Sterling steadies vs dollar ahead of BoE, ECB meetings") likely reads hawkish, especially on (the) Asset Purchase Programme (APP), for a market that has been pushing back against normalization,” Citi analysts said in a research note. However, explicit delays or new [easing seem unlikely amid further inflation](https://www.financedigest.com/inflation-in-key-german-states-eases-for-second-month.html "Inflation in key German states eases for second month") surprises,” they added. The three-month Euribor interbank borrowing rate rose to its highest since September 2020 at -0.498%, in a sign of [rising funding](https://www.financedigest.com/rate-rise-fears-prompt-third-week-of-global-equity-funds-outflows.html "Rate rise fears prompt third week of global equity funds outflows") costs. We expect (ECB president Christine) Lagarde not to make any commitment at the [ECB’s policy meeting,”](https://www.financedigest.com/german-gloom-dampens-stocks-as-fed-ecb-meetings-beckon.html "German gloom dampens stocks as Fed, ECB meetings beckon") MFS’ Piazza added. We just see a possible rise in volatility if she doesn’t rule out a rate rise by year-end during the [press conference.”](https://www.financedigest.com/5-top-tips-when-holding-a-crisis-press-conference.html "5 Top Tips When Holding a Crisis Press Conference") Piazza argued that “yields in the short-dated part of the German curve are currently pricing very limited chances of [rate hikes](https://www.financedigest.com/oil-falls-as-earthquake-impact-on-crude-eases-rate-hike-fears-rise.html "Oil falls as earthquake impact on crude eases, rate hike fears rise") by year-end. Germany’s 2-year inflation-linked [bond yield](https://www.financedigest.com/stocks-fall-bond-yields-rise-as-focus-shifts-to-fed-rate-outlook.html "Stocks fall, bond yields rise as focus shifts to Fed, rate outlook") fell 46 bps to -5.504%, after hitting an all-time low at -5.672%. Deutsche [Bank economists “expect the Ukraine crisis](https://www.financedigest.com/how-the-2023-banking-crisis-unfolded.html "How the 2023 banking crisis unfolded") to prevent the (European) central bank from announcing Asset Purchase Programme (APP) tapering at this point. Italy’s 10-year government bond yield rose 4.5 bps to 1.567%, with the Italian [German yield spread](https://www.financedigest.com/german-yields-steady-spreads-tighten-after-recent-repricing.html "German yields steady, spreads tighten after recent repricing") widening to 163 bps. This week’s [ECB meeting “presents bearish euro](https://www.financedigest.com/digital-euro-will-be-free-but-limited-in-scope-ecb-says.html "Digital euro will be free but limited in scope, ECB says") duration risk near-term, with the periphery the most vulnerable. Indeed, BTPs look around 8-20 bps rich versus other [risk assets”](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way"), Citi analysts said. Duration measures the sensitivity of the price of a [bond or other debt instrument to a change in interest rates](https://www.financedigest.com/stocks-bonds-extend-rally-on-hopes-rate-hikes-ease.html "Stocks, bonds extend rally on hopes rate hikes ease"). (Reporting by Stefano Rebaudo, additional reporting by Dhara Ranasinghe; Editing by Alex Richardson) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---