German 30-year yield hits fresh 14-year high as fiscal supply concerns weigh

By Amanda Cooper and Stefano Rebaudo

LONDON, Dec 12 (Reuters) - German government bond yields rose on Friday after hitting their highest level since March earlier this week, underscoring how investors have begun pricing in euro zone rate hikes, in sharp contrast to the United States, where rates appear set to fall.

Meanwhile, Germany’s 30-year yield DE30YT=RR, more sensitive to long-term fiscal concerns, climbed to a fresh 14-year high of 3.498%, up 3.5 basis points, as long-dated bonds sold off on fears of rising fiscal spending and heavier issuance after Berlin pledged big investments in defence and infrastructure.

Demand for ultra-long debt is set to shrink as Dutch pension funds, a key buyer, will no longer need to hold large amounts of these assets after an industry reform.

German 10-year Bund yields DE10YT=RR, which serve as a benchmark for the wider euro zone market, were up 1.5 bps at 2.17%, having risen 6 bps this week to their highest since March on Wednesday. Two-year yields DE2YT=RR fell 1 bp to 2.16% after hitting 2.203%, the highest since March 18.

U.S. 10-year Treasury yields rose on Friday after two straight sessions of declines, as investors assessed commentary from a flurry of Fed speakers and a positive outlook on the economy.

NEXT ECB MOVE A HIKE?

The European Central Bank has reiterated a number of times it is "in a good place", with regard to the outlook for inflation and growth and did not see any immediate need to cut rates again, leading markets to assume borrowing costs would remain largely stable next year.

Comments from influential policymaker Isabel Schnabel earlier in the week suggested that she at least believed the next likely move in rates would be a hike, prompting a flurry of positioning and a rise in yields.

According to Barclays, "Schnabel's 'next move could be a hike' message is a false alarm for now and one that is unlikely to get widespread traction within the Governing Council."

Some analysts were cautious even about the outlook for a stable policy rate, as risks to growth and inflation persist amid trade uncertainties and a strong euro.

"Recent data, such as a contraction in German exports to the U.S. and China, underscores the fragility of trade dynamics," said Annalisa Piazza, fixed income research analyst at MFS Investment Management.

Money markets have priced out an ECB rate cut in 2026, while assigning around a 25% probability to a tightening move by December 2026 EURESTECBM9X10=ICAP and a 55% chance by March 2027 EURESTECBM11X12=ICAP. The ECB depo rate is currently at 2%.

Deutsche Bank sees 2% as the terminal policy rate. In its baseline the next move is a hike in mid-2027 when the combination of fiscal easing and a tight labour market shifts the inflation risks to the upside of the target.

Next week brings delayed U.S. jobs data and a flurry of central bank decisions, with the ECB expected to stay firmly on hold. The Fed, meanwhile, is seen cutting rates further next year.

This has cut the discount of two-year Schatz yields, which are more sensitive to rate expectations than other maturities, to two-year Treasury yields DE2US2=RR to 135.34 bps, the smallest since May 2023, according to LSEG data.

SPREADS LOOK ATTRACTIVE

Jefferies economist Mohit Kumar said U.S./German spreads may offer investors an opportunity to exploit the rate differential and said his team were maintaining a long position in short-dated euro debt.

On Thursday, strategists at UBS said they recommended investors take a long position in Bunds, on the grounds that term premia - a measure of the compensation investors demand to hold long-term government debt - are too high, considering the long-term outlook for German growth and inflation. They price in a target rate of 2.75% and are prepared to close the position to avoid losses at 2.95%, they said.