(Corrects to gap between five- and 30-, not 10- and 30-year yields in para 6)
Oct 14 (Reuters) – German bond yields were set for their biggest two-day falling streak in months as bond markets continued to reverse a recent spike in borrowing costs.
Government bond yields across major developed markets, driven higher over the last month by worries around inflation and hawkish comments from central banks, have fallen sharply since Tuesday as markets started to consolidate. Bond yields move inversely with prices.
On Thursday in the euro area, Germany’s 10-year yield, the benchmark for the bloc, was down 4 basis points to -0.17% by 1134 GMT, far below Wednesday’s near 5-month high of -0.088%.
Down 7 bps over the last two sessions, it was set for its biggest two-day drop since early July.
The 30-year yield led Thursday’s rally and down 11 bps in the last two sessions, was set for its biggest two-day fall since early March.
The yield curve continued to flatten after a sharp move on Wednesday and narrowed to the flattest since late August as measured by the gap between five- and 30-year yields at 78 bps.
And Thursday’s drop in yields continued to be driven by falling “real” yields on inflation-linked bonds, which outpaced the fall in nominal bond yields. Germany’s 10-year real yield was down 5 basis points to -1.87%, the lowest in over a week.
Peter McCallum, rates strategist at Mizuho, noted that moves in euro area yields were being driven by moves in the UK government bond market in particular, where investors are betting on a rate hike from the Bank of England by the end of the year, while long-dated yields have fallen sharply.
The moves suggest the “market is thinking that would be a policy error, so that would curtail growth too much and might not necessarily have the desired impact on inflation. So it would really be a hit to demand that isn’t warranted,” McCallum said.
With the focus on monetary policy, investors are closely watching central bank speakers on Thursday.
In the euro area, European Central Bank President Christine Lagarde said Europe’s inflation swing is still seen as temporary and there are no signs yet that the recent surge is becoming embedded in wages.
And given the influence of UK rates on the euro area, the Bank of England is also in focus. Policymaker Silvana Tenreyro said it should not raise rates to tackle a surge in inflation caused by higher energy prices and semiconductors if it thinks these effects will be shortlived.
U.S. Federal Reserve policymakers will also be in focus later in the session after the bank’s September meeting minutes showed how it might start reducing its bond purchases from mid-November.
In the primary market, Ireland raised 1.5 billion euros from bonds due 2031, 2045 and 2050.
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