The move higher in yields that started in September has continued in October and November. During the second half of August, the 10Y Bund yield traded below -0.70% at times, while 30Y Bund yields sometimes dipped below -0.25%. Today, 10Y and 30Y Bund yields are at -0.25% and +0.30%, respectively.

In our research paper FI Research: Seven reasons why yields are higher of 23 October we looked into the factors behind the move higher in yields. We point in particular to the repricing of the ECB. The market has gone from a situation where it expected further rate cuts to basically expecting the ECB to be on hold after the depo rate was cut to -0.50% at the September ECB meeting. The graph below shows the 1y1y rate (expected 1Y rate starting in one year). It has a very close correlation with the 10Y yield.

The repricing of the ECB comes after it became clear that the ECB Governing Council was heavily divided when the ‘big package' was presented in September. Hence, it seems unlikely that Lagarde as new ECB President will be able to get a majority for further monetary easing. The ECB is now basically on hold and instead trying to convince ‘surplus countries' to step-up fiscal spending.

The better risk appetite on the back of positive trade and Brexit news has also helped to change rate expectations. It has fuelled the strong equity rally and pushed inflation expectations higher for a change.

New rhetoric from the Federal Reserve has also been an important factor for the move higher in yields. At the latest meeting on 30 October it became clear that after three rate cuts the Fed is now on hold. Hence, we have also changed our outlook for the Fed Funds rate and now only expect one more rate cut over the next six months to 1.5%. Before we expected that the rate would be slashed all the way to 1.0%.

It should also be underlined that US numbers in particular have been positive over the past month. We saw that 128,000 new jobs were created in October despite the GM strike lowering the number by 50,000 persons.

 

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