German Bond Yields Spike on Worries Over ECB Plans

German government bond yields surged on Tuesday, driven by investor expectations that the European Central Bank (ECB) will announce more rapid policy tightening after its meeting on Thursday.

Germany's influential 10-year government bond yield rose 2.5 basis points, reaching 0.038%, not far off a two-year high.

Strong consumer data from Germany and France this week signaled that inflation for the region would remain stubbornly high, somewhere just below December's record of 5%.

Analysts are nervously watching if ECB President Christine Lagarde will hold firm and rule out an interest rate hike for this year. Money markets believe otherwise, asserting there is a 90% chance the ECB will introduce a 25-basis-point hike by October.

Commentators anticipate the ECB will slow the pace of its pandemic-era bond purchases at the end of March, paving the way for more aggressive monetary policy interventions in the form of an interest rate increase. 

What does this mean for me?

Government bond yields are interest-rate based. When the cost of borrowing increases, bond yields edge upward. The rise in German bond yields reflects moves by some investors to get ahead of the game before any interest rate increases are announced.

The latest movements in the bond markets will give you, as a trader in bonds, a clear indication of how bond investors strategically act ahead of important announcements. Keeping in step with key global policy moves can only serve your own bond-buying strategy well.