Germany’s bond yield curve traded at its deepest inversion since 1992 on Friday in a potentially worrying sign for Europe’s biggest economy.
German bond yields, seen as a benchmark for the currency bloc, edged higher on Friday but remained on track for their third consecutive weekly fall. Yields move inversely to prices.
An inversion is uncommon and is seen by many economists as a precursor to a recession.
Germany’s curve inversion extended late on Thursday, with the gap between the 2-year and 10-year government bond yields falling to -27 basis points (bps), before trading at -25 bps on Friday. That was the widest gap since Oct. 1992, Refinitiv data showed.
When longer-dated yields are lower than those on shorter-dated bonds, it suggests investors expect the central bank to raise interest rates in the short-term before cutting them later to deal with slowing growth.
Christoph Rieger, head of rates and credit research at Commerzbank, said the German curve has less predictive power than that of the United States, because it takes into account the diverse economies of the euro zone.