German 10s/30s curve steepens to fresh 7-year peak after Japan vote

By Stefano Rebaudo

Feb 9 (Reuters) - The gap between 10 and 30-year German yields hit a fresh seven-year high on Monday, driven by investor concerns over fiscal trajectories and the potential crowding-out effect on euro-area bonds from rising Japanese yields.

Japanese government bond yields were flat to higher along the curve after Prime Minister Sanae Takaichi's coalition secured a historic election victory on Sunday, paving the way for promised tax cuts and increased military spending aimed at countering China.

Meanwhile, euro area shorter-dated borrowing costs edged higher as investors await U.S. data later this week.

"For a Japanese investor, it would make sense to focus on the domestic bond market instead of buying U.S. Treasuries or Bunds," Mohit Kumar, economist at Jefferies, said.

"Hence, we should see some crowding-out effect, not just for sovereign yields but also spread products," he added, arguing that expansionary fiscal policies support Jefferies' view of staying away from the long end of the curve globally and favouring steepeners.

The yield curve steepens when long-dated yields rise faster than short-dated ones.

Germany's 30-year government bond yields DE30YT=RR - more sensitive to long-term fiscal concerns - rose 3 basis points to 3.08%. The gap between German 30-year and 10-year yields DE10DE30=RR hit its highest since December 2018 at 68.09 bps.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, rose one bp to 2.85%, after hitting 2.813% on Friday, its lowest point since January 19.

The Sentix index measuring investor morale in the euro zone rose unexpectedly in February, its third consecutive monthly gain and its highest level since July 2025, a survey showed on Monday.

US DATA IN FOCUS

With a brief U.S. government shutdown delaying the January employment report, the jobs data will be released alongside figures covering consumer prices and retail sales.

The figures could alter market pricing for the Federal Reserve's upcoming meetings, though the central bank will receive another round of data before its gathering from March 17 to 18.

U.S. Treasury yields rose, with the policy-rate-sensitive 2-year US2YT=RR up one bp at 3.51% in early London trade, after rebounding from a more than three-month low on Friday ahead of economic data.

German 2-year bond yields DE2YT=RR, which are more sensitive to expectations for policy rates, were flat at 2.07%. They reached 2.046% on Friday, their lowest point since December 3.

ECB policymaker Gediminas Šimkus reiterated the central bank was equally likely to raise or cut interest rates, but it is hard to know when any such move will take place given the prevailing uncertainty about trade and geopolitics.

Italy’s 10-year government bond yields IT10YT=RR were up one bp at 3.48%. The gap versus Bunds was at 60 bps after tightening to 53.50 bps in mid-January, its lowest level since August 2008.

Investors expect little chance of significant further tightening in euro area yield spreads without progress on financial integration.

Morgan Stanley sees greater risks for spread‑compression trades in the second half of the year, ahead of elections in several countries and due to the crowding‑out effect from AI‑related corporate issuance, which could weigh on the euro area government bond market.