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Mark Gilbert and Marcus Ashworth

Bond Market Plot Twist Puts Europe's Recovery at Risk

Higher U.S. government borrowing costs are driving Europe’s benchmark yield into positive territory.

Global Rainbow Artwork Lights The Southern Sky
Photographer: Finnbarr Webster/Getty Images Europe

The 10-year German bund yield has turned positive after almost three years below zero. It's a sign of the times as government borrowing costs are on the rise globally. With the euro zone’s nascent economic recovery more fragile than that of the U.S., however, the European Central Bank needs to remain vigilant that increased market interest rates don’t choke growth. 

Renewed hawkishness at the Federal Reserve has spooked the bond market, with the 10-year Treasury yield approaching 1.9% from 1.5% at the end of last year. German levels have duly increased, climbing above zero on Wednesday after averaging -0.3% in 2021. Foreign holders exiting euro zone debt for the higher income available in the U.S. will naturally drive yields higher unless there is sufficient demand within the euro zone to soak up the slack. The ECB, the biggest buyer in the room, is still scooping up bonds as part of its stimulus effort. Its pandemic quantitative easing program, known as the PEPP, is drawing to a close in March to be replaced by a pre-existing, albeit smaller, package.