Global Borrowing Costs Spike

Germany’s benchmark 10-year bond yield has made its biggest weekly jump since December 2015. Borrowing costs across the eurozone and beyond also rose as investors prepare for an end to the period of easy monetary policy.

In Germany, 10-year Bund (sovereign) yields fell 1.5 basis points to 0.44%, on Friday, but remain 19 basis points up over the week and saw their biggest weekly jump since December 2015, DW reported.

Market fears of tighter monetary policy also weakened the dollar and pushed yields on 10-year US Treasuries up 14 basis points in the past week to 2.28%–near a one-month high.

Ten-year bond yields in France and the UK have risen at least 20 basis points over the past week. Italian yields were set for their biggest weekly jump since March, increasing the borrowing costs of the highly indebted eurozone country.

Main driver of the bond sell-off was comments by ECB chief Mario Draghi earlier this week that the eurozone was headed towards “reflation”, interpreted to mean that Draghi was planning to taper his €60 billion-per-month ($68.54 billion) bond-buying program.

The ECB, Bank of Japan and the US Federal Reserve bought large amounts of bonds to shore up their economies after the financial crisis, driving down bond yields to extreme lows, which is known as quantantive easing.

The Fed stopped buying bonds in 2014 and has raised short-term rates. Draghi’s recent remarks suggest more central banks might be following suit.

Money markets price in around an 80% chance that the ECB will hike rates over the next year, up from 20% earlier this month, the Financial Times reported.

Yield Rises

Momentum for monetary tightening by the ECB is gathering pace, with the European Commission’s economic sentiment indicator hitting its highest levels since August 2007, possibly a signal that May’s weak inflation could be a blip.

Inflation–which is targeted by the European Central Bank at 2%–fell to 1.3% in June from 1.4% a month earlier, bringing some comfort to bond markets and allowing yields to fall away from their earlier highs.

“It certainty feels like a sentiment change out there. The trigger may have been Draghi’s comments, but the fact is that even after clarification, yields have continued to rise and that suggests there is more at play,” Nordea chief strategist Jan von Gerich told the news agency Reuters.

“People are starting to come to the view that tapering will happen soon and they have to position for that.”

CBs Coalescing

Bloomberg news agency suggested on Friday that nothing fundamental has happened on the economic data front or politically.

“We’ve just been talked at by central bankers getting in their ‘we warned you’ excuses on overpriced assets… (but) clouds hanging over the economic and inflation outlook mean there’s no realistic prospect of a change in monetary policy.”

Global central bankers are coalescing around the message that the cost of money is headed higher—and markets had better get used to it.

Just a week after signaling near-zero interest rates were appropriate, Bank of England Governor Mark Carney suggested on Wednesday that the time is nearing for an increase. His US counterpart, Janet Yellen, said her policy tightening is on track and Canada’s Stephen Poloz reiterated he may be considering a rate hike.

“The market is very sensitive to the idea that a number of central banks are appropriately and belatedly reassessing the need for emergency policy accommodation,” said Alan Ruskin, co-head of foreign exchange research at Deutsche Bank AG.

The euro rose for a third day on Thursday, adding 0.4% to trade at $1.142 in London. The currency has gained more than 2% this week.

The Federal Reserve has been setting the tone in the trend toward a re-normalization of monetary policy and Yellen gave no sign that her plans for tightening were changing, even as she acknowledged that some asset prices could be rising more than warranted by fundamentals.

And while rate increases are off the table for the ECB until well after it eventually ends bond purchases, Draghi got a taste of just how difficult it will be to steer a course out of extraordinary stimulus without unsettling markets.