German bond yield curve most inverted in nearly 31 years

The German yield curve was at its most inverted level in nearly 31 years on Tuesday as investors bet that a flagging economy would lead the European Central Bank to cut interest rates after they reach their peak around 4%.

Euro area borrowing costs barely moved after ECB President Christine Lagarde outlined a lengthy fight against price growth that must dampen demand and force firms to curb prices.

It was Lagarde’s first public speech following the weak PMI and Ifo data which added to doubts about the health of the bloc’s economy.

Money markets kept betting that the deposit facility rate would peak around 4%.

Germany’s 2-year government bond yield, most sensitive to expectations for policy rates, rose 2 basis points (bps) to 3.16%. Last Friday, it hit 3.282%, its highest level since March 9.

“Markets have priced two more rate hikes after the ECB’s last policy meeting; I think they need more data to change their view,” said Massimiliano Maxia, senior fixed income specialist at Allianz (ETR:ALVG) Global Investors.

Germany’s 10-year yield, the bloc’s benchmark, was up 1 bp at 2.31%.

The gap between Germany’s 10-year and 2-year yields was at -85.6 after falling earlier in the session to -86.8, its lowest level since September 1992.

Investors will also look at U.S. economic data later in the session, including new orders for durable goods, housing figures, and consumer surveys from the Conference Board and the University of Michigan.

Italy’s 10-year government bond yield rose 0.5 bps to 3.94%.

The spread between Italian and German 10-year yields, a gauge of confidence towards the euro area’s most indebted countries, was roughly stable at 163 bps. It was around 220 bps at the end of last year.

Investment funds have been piling back into fixed-income assets to lock in the higher returns on offer, with the euro zone’s peripheral bonds in the spotlight as they deliver enticing yields while benefiting from an ECB backstop – the Transmission Protection Instrument – to avoid risks of disorderly bond sell-offs.

Greece’s bonds outperformed their peers after Kyriakos Mitsotakis’ centre-right New Democracy party got 158 seats in the 300-seat parliament in the repeat election on Sunday, well ahead of the 48 secured by leftist Syriza.

Greece’s 10-year government bond yield was down 2 bps at 3.54%.

The yield gap between Greek and German 10-year yields was 115 bps after hitting last week its lowest since October 2021, below 110 bps. The Greek-Spanish yield spread on Friday hit 25 bps, its lowest level since 2008.