CE Local Debt: Not Much To Like

June 2008 | Market Strategy

With fixed income markets increasingly pricing in a 25bps hike in the European Central Bank 's (ECB) refinancing rate, German treasury yields have soared. The benchmark 5-year bobl spiked 30bps in the week since June 3, to at one point trade at 4.57% on June 10. This was subsequent to a sharp uptrend in play since mid-March, which saw the bund spike from 3.20% to 4.25% at the beginning of June. The outlook for the short-term is distinctly for further upside. The yield has now pushed through a major long-term trendline support level at 4.50% which is suggestive of a move to 5.00%. Risks of even further rises would be dependent on the direction of eurozone inflation in upcoming months and the extent to which the ECB chooses to aggressively tackle the issue. In the event of cumulative hikes in excess of 25bps then a move above 5.25% for the 5-year bobl would be likely.

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