Germany’s 10-year swap spread hits lowest in at least 20 years as government collapses
Updates at 1555 GMT
By Stefano Rebaudo
Nov 7 (Reuters) -Inflation concerns and worries about increasing Bund supply after the government collapse in Germany triggered a rise in euro area yields on Thursdayand led Germany's 10-year swap spread to hit its lowest level in at least 20 years.
Analysts expect new U.S. policies after Donald Trump was elected president to result in more inflation as additional tariffs raise prices for consumers and businesses, which will also affect the euro zone.
German Chancellor Olaf Scholz sacked his finance minister on Wednesday and paved the way for a snap election, triggering political chaos in Europe's largest economy hours after Trump won the U.S. presidential election.
Germany's 10-year yield DE10YT=RR, the euro area's benchmark, rose as high as 2.498%,its highest since mid-July. It was last up 2 basis points (bps) at 2.413%.
The selloff in German assets was in line with euro areapeers as yields in French OATs FR10YT=RR, Italian BTPs IT10YT=RR and Spanish Bonos ES10YT=RR all rose a similar amount, leaving spreads roughly unchanged.
Investors worry about uncertainty over the budget and a possible increase of government bond supply.
"The main market focus is currently on the prospects of increased debt issuance to finance a package to revive the German economy, which has increased yields on German government bonds," said Danske Bank analyst Rune Thyge Johansen.
"The liberal finance minister was the main opponent of increasing debt."
Germany's 10-year asset swap spread (ASW) DE10IRS10Y=RR was at -5 bps after hitting -6.70 bps, its lowest level since at least 2003, according to LSEG data.
It was at around 23 bps in early October and at about 50 bps at the end of 2023.
Swap spreads, the difference between the 10-year yield and the 10-year swap rate, can be a reflection of risk appetite, as well as a market gauge of an issuer's credit quality.
Analysts said the drop in the spread was also down to the effect of European Central Bank quantitative tightening, which reduced the demand for sovereign bonds across the euro area.
"The quantitative tightening of the ECB and fears of increasing supply due to the political crisis in Germany triggered the recent moves in the asset swap spread, which dropped in the negative territory in 10y tenors," said Hauke Siemssen, rate strategist at Commerzbank.
The 2-year yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, was little changed at 2.188%.
The German yield curve steepened further with the gap between 10-year and 2-year yields DE2DE10=RR rising up to 26.8 bps, a fresh 2-year high.
"Fears of long-standing inflation in the U.S. and its impact in the euro area are driving (long-dated) yields higher today with a further steepening of the yield curves," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, arguing investors expect Republicans to have a majority in Congress.
Republicans won control of the U.S. Senate. If they ultimately prevail in the House, they will be able to dictate the agenda in Washington, helping Trump deliver on his promise to slash taxes and restrict immigration for at least the next two years until the 2026 midterm elections.
The benchmark U.S. 10-year yield US10YT=RR, which surged over 13 bps on Wednesday after Trump's victory, was down 7 bps at 4.3433%.
Reporting by Stefano Rebaudo, additional reporting by Samuel Indyk; Editing by Alex Richardson and Andrea Ricci
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