(Bloomberg) -- A key segment of the German yield curve has normalized as traders bet the European Central Bank will need to accelerate the pace of interest-rate cuts amid growing concern the region’s economic recovery has run out of steam.
The rate on two-year bunds fell below the 10-year equivalent on Monday, bringing the spread between the two tenors above zero for the first time since November 2022. It’s a phenomenon already seen in the US and UK, as the Federal Reserve and Bank of England also loosen monetary policy.
The latest leg of the repricing comes amid signs the euro-area economy is in the midst of a downturn, with data released on Monday showing private-sector activity shrank for the first time since March. Last week, the Bundesbank said Germany may already be in a mild recession.
The German yield curve was inverted for the past two years on expectations the ECB would keep monetary policy tight. That drove investors into longer-dated notes and upended the traditionally upward-sloping shape of the curve.
But with inflation in the region hovering just above the central bank’s mandate at a three-year low and the Fed starting its easing cycle with a big half-point cut, the case for further easing is growing. Swaps now imply 43 basis points of additional ECB easing by the end of this year, from 38 basis points last week.
The two-year German yield has dropped 25 basis points this month to trade at 2.14%. Yields on 10-year notes, meanwhile, fell 15 basis points in that period to 2.15%.
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