In in nearly two months the German yield curve flattests again - and for the Germans.
Wall Street estimates predicted Deutsche bond values for the best week of the year on Friday and Southern European bonds rallied sharply as a dovish result of the ECB meeting a day earlier supported the Euro area bond price.
On Thursday, the European Central Bank maintained an elevated pace of Pandemic Emergency Bond purchases for the third quarter.
Although it will maintain its economic projections for this year and next, inflation is still expected to stay below the ECB target at least until 2023, suggesting that support will be given in the aftermath of the PEPP programme, which expires next year.
US Treasury and Japanese stock loans have fallen to their lowest since late April on Friday in a wider fixed income rally, which also saw Britain's balance interest, euro area debts and eurobond yields fall.
After a long rise, Treasury yields ignored on Thursday the largest quarterly inflation drop in a year. Investors covered shorts.
As the rates market is trading in on overcrowded consensus shorts and forcing position capitulation across the board, BofA analyst Ralf Preusser and Myria Kyriacou told clients. This is especially visible in the price action across the last two days and this is clearly evident in any price action.
On Friday, Germany's benchmark German yield, the 9-year Euro area benchmark down by 3 basis points to 0.18%, is down 7 basis points this week in its biggest weekly fall in 2021. Bond yields move with the price inversely.
The German yield curve, measured by the gap between two and 10 year yields, was at its flattest in nearly two months at 40 BPM in almost two months.
The Southern European bonds, which on Friday outperformed the ECB session on Thursday, continued rallying on Friday also.
Down nearly 5 bps to 0.76%, pushing the highly watched risk premium over German bonds to a new five-week low of 103 bps.
The balance of risks argues for range-bound yields over the summer. We expect a selective compression of spreads, with the Italian BTPs the clear winner, Spyros Andreopoulos told clients referring to the senior bonds at BNP Paribas.
They expect the risk premium to fall by July to around 90 bps.
The focus was also on three of 25 ECB members who wanted to raise the pace of the purchases during the meeting, citing the better outlook for growth and inflation, according to Reuters sources.
Klaas Knot, one of the most open members of the Council, called for new European budget rules to preserve a government role for years to come while monetary policy remains constrained.
Another hawk, Robert Holzmann, said that a rise in the inflation rate above 3 would force the ECB to take another look at its policy approach.