German 10-year yield rises above 2-year for first time since 2022 after PMI data
Updates moves at 1329 GMT, adds context
By Alun John
LONDON, Sept 23 (Reuters) -Yields on Germany's 10-year bond rose above those on its two-year debt on Monday, the first time this part of the curve has disinverted since November 2022, as soft business activity data drove expectations of more ECB rate cuts this year.
French government bonds were also in focus, with France's 10-year yield a whisker away from rising above Spain's for the first time in over a decade.
Yields edged up in the afternoon session after U.S. survey data indicated the world's biggest economy was holding up better than its European peers in September, with price pressures rising.
The yield on the rate-sensitive German two-year bond was last down 7 basis points at 2.183%, while the 10-year yield dropped 3 bps to 2.188%. DE10YT=RR, DE2YT=RR, DE2DE10=RR
Longer-dated bond yields are generally higher than shorter-dated ones. But when this reverses, or inverts, it is often seen as a signal of a recession in the next one to two years.
The curve usually turns positive before a downturn begins, with short-term yields dropping faster on expectations of interest rate cuts to support a weakening economy.
The U.S. yield curve disinverted in August.
Kenneth Broux head of corporate research FX and rates at Societe Generale said the German yield curve disinversion "is more than symbolic on a day when the weak PMIs will inevitably fuel the debate about (an) October rate cut by the ECB".
"Are they behind the curve on inflation v growth?" he said.
Purchasing manager index survey data on Monday showed France's services sector contracted sharply in September, after a strong August driven by the Olympic Games.
That was followed by German data showing business activity in the euro zone's largest economy contracted at its sharpest pace in seven months in September.
Markets are currently pricing around a one in three chance that the European Central Bank will cut rates by 25 bps at its October meeting.
FRENCH JITTERS
French bonds were less moved by the data than German, suggesting the latter were seeing safe-haven inflows and concerns that politics are keeping investors away from French debt. France's 10-year yield fell 2 bps to 2.952%. FR10YT=RR
That caused the gap between German and French 10-year yields to widen to as much as 79 bps during the session, its widest since market volatility in early August. DE10FR10=RR
That spread, a gauge of the higher returns investors demand for holding French debt over the European benchmark, has been in focus since it widened sharply in the run up to France's parliamentary elections earlier in the year.
New French Prime Minister Michel Barnier unveiled his ministerial line-up late on Saturday, tapping 33-year-old junior lawmaker Antoine Armand for the prestigious economy and finance ministry, and concern about this government's longevity was a contributor to French bonds' underperformance, said Rabobank analysts in a note.
In a further sign of investor jitters about France, Spain's 10-year bond yield, which was 3 bps lower at 2.98%, ES10YT=RR is now just 1-1/2 basis points away from falling below France's for the first time since late 2007, according to data from LSEG's workspace.
This would be notable, said Rabobank, since French government bonds typically trade based on France's position as part of the euro zone's core rather than based on the country's fundamentals.
"If (French) OATs were to trade cheap to (Spanish government bonds) on a sustained basis this would imply that the country’s de facto core status no longer holds. This, in turn, would be a decidedly negative signal in terms of regional cohesion," they said.
Italy's 10-year yield was down 3 bps at 3.54%, and the gap between Italian and German 10 year yields was 134 bps. IT10YT=RR, DE10IT10=RR
Reporting by Alun John; Additional reporting by Linda Pasquini; Editing by Emelia Sithole-Matarise, Alexander Smith, Susan Fenton and Timothy Heritage
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