With inflation expected to close the year above 4% and GDP expected around 5.9%, it's unlikely that long term yields will drop despite a slowdown in growth. We could see the US yield curve to bear steepen as the market prepares for the Fed to taper. However, a bear flattening of the yield curve where short-term yields rise faster than long-term yields is more probable, making it possible for 10-year yields to break above their year’s high at 1.77% and continue to rise towards 2%.
German Bunds: not ready for 0% yet.
Yesterday, we saw 10-year Bund yields rising to -0.08% for the first time since May pushing towards zero for the second time since 2019.
However, today we are witnessing a strong reversal driven by German CPI data in line with expectations and a solid 30-year Bund auction. The auction received a bid-to-cover of 2x, the highest since October 2020. Strong demand can be explained by the fact that 30-year Bund yields rose to the highest since June yesterday, enabling the auction to price with an average yield of 0.35%, the highest since June 2019.
Yet, we still expect Bund yields to rise towards 0% by the end of the year driven by inflation expectations, a new German government and higher yields in the US.