By Yoruk Bahceli
– Euro area “real” yields, representing the cost of borrowing after stripping out inflation effects, tumbled on Monday to a new record low as a resurgence in COVID-19 infections threatened economic recovery.
The inflation-adjusted yield for the euro area as a whole — measured by the difference between the euro 10-year swap rate and euro 10-year inflation-linked swap rate — fell to minus 1.54% on Monday.
Real yields are viewed as a measure of expected financial conditions and while inflation-linked bonds are often used to measure them, analysts said the illiquidity of this market in Europe in particular makes swaps a better gauge.
Swaps essentially reflect where traders think a rates might be over the period of a contract.
The gap between the swap rate and the inflation-linked swap rate has narrowed nearly 20 basis points since mid-June and nearly 40 bps from this year’s peak at around -1.15% in late February.
Euro area real yield record low https://fingfx.thomsonreuters.com/gfx/mkt/oakveddropr/real%20yield%20july%2019.png
Analysts said the collapse in real yields showed investors were betting on central bank largesse to be sustained should the economy require further support.
“Quite an interesting move, it would suggest a certain degree of faith in central bank response to slowing growth,” Antoine Bouvet, senior rates strategist at ING, said of the record-low real yields.
In Germany, the bloc’s benchmark debt issuer, the inflation-linked 10-year benchmark bond yield fell to minus 1.686%, the lowest since August 2019, according to Refinitiv data.
Real yields have also been falling in the United States where 10-year inflation-linked bond yields, known as TIPS, fell to -1.092%, the lowest since January.
While the plunge in real yields appears at odds with many central banks including the U.S. Federal Reserve moving to wind down pandemic-era monetary stimulus, the European Central Bank is expected to be one of the last to do so, with chief Christine Lagarde repeatedly emphasizing it is too early to talk about tapering.