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Government bond yields fall in Europe

 Government bond yields fall in Europe

Rising bond yields have spooked markets in 2021. Market participants are concerned that an economic recovery together with fiscal stimulus will trigger a sharp increase in inflation. The reason for that would be constrained consumer demand when lockdowns end.

On March 15, US Treasuries yields were close to the 13-months peak. Investors' expectations of accelerated economic growth in the US boosted the yield. Optimism came after President Joe Biden's rescue plan got its final approval.

Meanwhile, German 10-year bund yields reached the peak of February 26 and stabilized below this level, settling at 0.350%. The Italian 10-year yield lost 2 basis points dropping to 0.621%. In fact, long-term eurozone inflation expectations advanced 1.50% for the first time in two years. The increase followed the recent rise in commodity prices, Lyn Graham-Taylor, rates strategist at Rabobank, said.

Indeed, the gap between the yield on 10-year US and German Treasury bonds has been at its widest since February 2020. There could have been two possible reasons for that: the large-scale fiscal stimulus in the US and a slow pace of the vaccination campaign in the EU.

On top of that, Italy announced tighter coronavirus restrictions last Friday. Meanwhile, France's coronavirus infections are also spreading exponentially. In this light, analysts no longer wait for significant easing in the euro area. They assume that the UK will lift restrictions first. Experts at The Goldman Sachs say that this could lead to Europe's reopening by around a month and a half.

In order to limit the rise in yields, the European Central Bank intends to increase the pace of its bond-buying. The regulator announced its decision during the last meeting. This is going to be a transitory measure but it will be enough to drive further widening of the USD-EUR rates differential.

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