Outgoing Finance Minister and new German Chancellor Olaf Schulz delivers a speech during the handover ceremony with his successor at the German Federal Ministry of Finance in Berlin, Germany, December 9, 2021.
Tobias Schwartz Reuters
The German government’s borrowing costs continued to rise on Wednesday, with the benchmark 10-year bond yield trading in positive territory for the first time in nearly three years.
May 2019 was the last time German 10-year bond yields were above zero, when accommodative policy from the European Central Bank began to pressure interest rates lower. The negative returns meant that investors were actually paying the German government to lend it money.
The European Central Bank is currently lagging the normalization path, compared to the Federal Reserve and the Bank of England, but rising inflation and broader moves in the global bond market have now helped push yields above zero.
Eurozone inflation hit a new record in December, raising more questions about the European Central Bank’s monetary policy. The central bank said last month that it would reduce its monthly asset purchases, but pledged to continue the unprecedented level of stimulus in 2022.
Central bank policy in times of financial stress usually focuses on the bond market. Central banks buy sovereign bonds, which lowers their yields, which lowers the government’s borrowing cost and also lowers interest rates for all types of loans and mortgages.
But the recovery from the coronavirus pandemic has sent consumer prices up amid this easy policy. Central banks are now looking to remove stimulus to try to cool inflation. The Bank of England has already raised interest rates by 15 basis points.
Rising energy prices have played their part in driving up inflation, as well as supply bottlenecks in products such as semiconductors. These factors also had an indirect effect on Germany’s GDP numbers.
The German economy grew by 2.7% in 2021. But the German Statistical Office said that growth is still 2% lower in 2021 compared to 2019, indicating that the economy has not yet returned to pre-Covid levels.
In the second half of 2021, there were indications that the German economy could be hurt by supply chain problems. In October, the country’s leading research institutes lowered their 2021 growth forecast to 2.4%. The German government has also lowered its annual growth forecast for 2021.
At 8 am UK time, the German 10-year bond yield was up 3 basis points for the session at 0.014%.
—Silvia Amaro of CNBC contributed to this article.