German Bunds Hold Decline as Yields Touch Highest Since June

  • Ten-year yield climbs above 0.1% for first time since Brexit
  • Rising inflation expectations are pressuring debt prices

Germany’s 10-year bonds held a decline from last week, with the yield rising to its highest since the U.K.’s Brexit vote amid an earlier selloff in global sovereign-debt markets.

Benchmark German bunds pared an earlier decline Monday as Treasuries rebounded after a measure of manufacturing in New York unexpectedly contracted. The yield on Germany’s 10-year securities climbed above 0.1 percent for first time since Britain’s referendum, spurred by rising investor expectations for consumer prices.

“The ongoing repricing in inflation expectations in the U.K. and the pressure on gilts is spilling over to European bonds,” said Elia Lattuga, a fixed-income strategist at UniCredit SpA in London. “The market is increasingly concerned about rising breakevens, because of what is happening in the U.K. but also because of the recent trend in oil prices and the expected rise in inflation.”

Germany’s 10-year bund yield was little changed at 0.055 percent as of the 5 p.m. close in London. The price of the zero percent security due in August 2026 was 99.464 percent of face value. The yield climbed earlier to 0.103 percent, the highest since June 23, having increased four basis points last week.

Inflation Upshoot

Government bonds around the world are retreating after comments from policy makers suggested faster inflation will be tolerated. Federal Reserve Chair Janet Yellen put forward an argument for Fed policy to be tightened slowly, saying on Friday that there are “plausible ways” that running the economy hot for a while could repair some damage caused to growth during the recession.

In the U.K., where the pound’s 18 percent decline since the Brexit vote pushed inflation expectations to the highest since 2014, Bank of England Governor Mark Carney echoed that sentiment, saying last week that he’ll tolerate an inflation-target overshoot. U.K. gilts have been the hardest hit in the recent selloff, with losses accentuated by the turmoil arising from the Brexit vote.

Even as they suffer from spillover effects from the retreat in global bonds, European debt still outperformed its peers in Britain and the U.S. in the past month, according to Bloomberg World Bond Indexes.

Economists surveyed by Bloomberg see scope for more stimulus by the European Central Bank. Seventy-eight percent of the 50 analysts forecast said it will announce fresh easing measures, with nine in 10 saying that will come in December at the earliest. Few expect action when the Governing Council meets in Frankfurt on Thursday to set policy.

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