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German bond yields top 0% for first time since May 2019

Yields for 10-year German bonds jumped into positive territory on Wednesday for the first time since May 2019 as surging inflation in the eurozone prompted fears of monetary tightening.

At 0715 GMT, Bund yields passed zero for the first time since the European Central bank launched a stimulus programme in 2019 to tackle the risk of a recession in the eurozone.

A bond generates a negative yield when investors are willing to pay more for it than the actual sum they are investing in it plus the returns it is offering.

German government 10-year bonds are seen as a safe haven for investors to turn to in times of instability.

The benchmark figure touched minus 0.91 percent in March 2020 when the coronavirus was taking hold in Europe, as investors were willing to take a loss in exchange for the relative safety offered by the government bond.

The further relaxation of the ECB’s policy to prop up the economy kept yields deep in negative territory until recently.

But unusually high inflation in recent months has encouraged central banks everywhere to tighten their response, with the ECB announcing a “step-by-step” reduction to its asset-purchasing programme.

The massive bond buying programme is the ECB’s main crisis-fighting tool, aimed at keeping borrowing costs low to stoke economic growth.

Inflation in the eurozone reached a record five percent in December, its highest value since records began in January 1997.

But unlike in the United States, where expectations are mounting that the Federal Reserve will hike rates multiple times this year, the ECB’s guidance still points towards its first rises in 2023 at the earliest.

The Frankfurt-based institution has long held its interest rates at historic lows, including a negative overnight deposit rate, which charges banks to park their money at the ECB.

Expectations of monetary tightening in the US have sent yields for US bonds, known as Treasuries, rocketing towards two percent.

So long as ECB policymakers stuck to their current approach, yields for German bonds should only track the upwards trend taken by Treasuries with “limited enthusiasm”, said LBBW analyst Elmar Voelker.

After turning positive, yields for the benchmark German bond climbed as high as 0.02 percent, before declining to sit around 0.01 percent at 10:00 am local (1000 GMT).