Friday, January 21, 2011

BAD OMEN: German Bond Yields Rising on Inflation Fears

Here at The Hourly G Command Central (which looks very much like the bridge of the Startship Enterprise), we’re so obsessed with the peripheral European bond markets—especially spreads on Spain’, Italy’s and Belgium’s debt—that this morning, we failed to notice that the German 10-year yield started rising.

[O’-boy—gulp for air—try to stay calm.]

At first, we noticed that the spreads on Spanish, Italian, Greek and Irish debt were stable against the German bund, or even slightly narrower in overnight trading—

—then we took a look at the benchmark: The German 10-year is at a yield of 3.17%, up 7 basis points this morning, while the bond yields of Spain, Italy and Greece are all lower

—looks like the bond markets are pricing in the fact that Germany is going to shoulder the brunt of the resuce efforts, regardless of what the Germans themselves might want.

German producer price inflation rose in December 0.7%, for a 5.3% year-over-year jump,. And what’s more, consensus and expectations are that—due to rising oil, agro and metals prices—this will continue in Germany.

So rather than stay below that nice, safe 3% yield level, the German 10-year looks like it has crossed a milestone, and is poised to fall further in price over the coming days/weeks. How far will it fall? And will any Spanish or Italian crisis erode the German bond even more?

At least if we were living in a Star Trek episode, we would know how it would end: Wiser and happier. This ending? Not so much.

Pass the antacid tablets—it’s going to be a bumpy warp-speed jump.

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