Investors in German debt are increasing their bets that the European Central Bank’s interest rate rises will push the European economy into a deeper downturn, as a closely watched recession indicator hit its most extreme level since 1992.
The gap between 2-year and 10-year German bond yields, which serve as the eurozone’s de facto borrowing benchmark, reached a 31-year low on Tuesday of minus 87 basis points, as markets repriced for higher interest rates despite recent signs that the eurozone economy is cooling.
The differential widened after Christine Lagarde, president of the European Central Bank, on Tuesday called for “persistent” high interest rates to kill off a second phase of inflation fuelled by rising labour costs.
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