(Bloomberg) -- Germany's two-year bond yields climbed above the European Central Bank's deposit rate for the first time since 2015, as investors dump the debt on the prospect of interest-rate hikes this year.
The yield, which is most sensitive to policy rates, climbed four basis points to minus 0.49%, the highest since 2016. It's surged in the past two months as record euro-area inflation puts pressure on policy makers to act.
The final leg toward this watershed moment occurred following Tuesday's 6-billion-euro ($6.8 billion) sale of new securities -- which typically come with a slight yield premium to older notes -- that took over as the two-year benchmark.
The ECB is now expected to increase borrowing costs for the first time in more than a decade, by 10 basis points to minus 0.4% in September and a full quarter-percentage-point by year-end according to money market wagers. The deposit rate is subsequently forecast to turn positive next year.
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That implies further pain for the region's bond markets. The yield on German two-year bonds, seen as the safest in Europe, has already climbed from a record low of minus 1.03% reached at the height of coronavirus panic in March 2020.
“This is only the beginning,” said Antoine Bouvet, senior rates strategist at ING Groep NV. “It looks like the ECB will rush to bring the deposit rate back to 0% next year, so that means schatz should be trading with a positive yield by the middle of next year.”
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