German Five-Year Yield Turns Positive for First Time Since 2018

(Bloomberg) -- German bonds tumbled on Friday, pushing the yield on five-year notes above zero for the first time in over three years as markets braced for the European Central Bank to scale back its accommodative monetary policy.

The yield rose more than 12 basis points to 0.08%, putting it on track for the biggest weekly surge since 2011. It comes amid a rout that gathered pace on Thursday, after ECB President Christine Lagarde indicated policy makers are no longer ruling out an interest-rate hike this year.

The move was seen as a pivot toward a more hawkish stance taken by global peers, including the Bank of England and the Federal Reserve. And it spurred traders to pull forward their expectations for monetary tightening in Europe, with money markets now pricing in around 50 basis points of hikes through December from the ECB.

European investors have grappled with negative-yielding debt for years, largely due to the ECB's ultra-low rates and bond-buying programs. But the pile has shrunk remarkably over the past year as investors brace for an era of extraordinarily loose policy -- supercharged during the pandemic -- to come to an end.

The pool of euro-denominated debt that yield less than zero is down more than 70% from a peak in 2020, to just over $2.7 trillion, the least since 2019. The yield on 10-year German bonds -- one of the region's safest assets -- turned positive for the first time since 2019 last month.

The five-year bund yield has climbed 33 basis points this week, while it's two-year peer climbed as much as 11 basis points to minus 0.22%, the highest since 2015.