Germany’s 10-year government bond yields return to 1% on rising risk appetite

Germany’s 10-year government bond yields hit a one-week high of over 1% on Tuesday, following recent scathing remarks from European Central Bank officials and a growing appetite for risk. Shanghai has achieved a three-day milestone without a new Covid-19 case outside the quarantine zone, which could lead to the start of lifting sanctions.

However, concerns over the economy continue to grow after weak data from China and the United States. Germany’s 10-year government bond yield, the block benchmark, rose 7 basis points (bps) to 1.003%, the highest since May 11.

“There is little way to keep up this weird pace in today’s European session,” Mizuho strategists said in a note addressed to clients. “Nevertheless, some investors may start to worry – as we do – about what such an aggressive hiking trajectory means for the eurozone economy,” he said, adding that the 10-year bond yield could face about 1% resistance.

ECB policymaker Franোয়াois Villarre de Galhous said on Monday that the euro’s weakness in the currency market could threaten the European Central Bank’s efforts to push inflation towards its target. “Concerned about the impact of lower euro inflation, Villarreal opened a new front yesterday in a battle of prospects,” ING analysts said.

Italy’s 10-year government bond yield rose 6 bps to 2.897%, expanding to 190 bps spread between German and Italian 10-year yields. Finance Minister Christian Lindner said Germany could not support the relaxation of EU financial rules, which should be “more realistic and effective”.

The war in Ukraine has raised concerns about the stability of public debt in southern European countries, with investors hoping that the European Commission will not implement the bloc’s debt reduction rules next year due to the conflict. However, less stringent regulations will enable most indebted countries to meet EU obligations without compromising economic recovery.

“We have no concerns about the sustainability of the Italian debt in the near term. However, the reluctance of the ECB to disclose the details of the so-called monetary dividend is a cause for concern for investors,” ING analysts argued when forecasting a 250 bps widening between Italian and German yields. ECB officials say the central bank has not recently discussed any concrete instruments to avoid fragmentation – yield spread between the core and the periphery, which could disrupt monetary transmission mechanisms – but they are ready to work.