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By Yoruk Bahceli
July 19 (Reuters) – “Real” euro area yields, representing the cost of borrowing after the effects of inflation were removed, fell to a new high on Monday as a resurgence of COVID-19 infections threatened economic recovery.
The inflation-adjusted return for the euro area as a whole – measured by the difference between the euro 10-year swap rate and the inflation-indexed euro 10-year swap rate – fell to minus 1.54% on Monday .
Real returns are seen as a measure of expected financial conditions and although inflation-linked bonds are often used to measure them, analysts have said that the illiquidity of this market in Europe in particular makes swaps a better indicator. .
Swaps basically reflect where traders think rates might be over the period of a contract.
The spread between the swap rate and the inflation-linked swap rate has narrowed by almost 20 basis points since mid-June and almost 40 basis points from this year’s peak to around – 1.15% at the end of February.
Analysts said the collapse in real yields showed investors were betting on sustaining central bank largesse if the economy needed further support.
“Quite an interesting move, it would suggest some degree of confidence in the central bank’s response to slowing growth,” Antoine Bouvet, senior rate strategist at ING, said of the record real yields.
In Germany, the bloc’s benchmark debt issuer, the yield on 10-year inflation-linked benchmark bonds fell to minus 1.686%, the lowest since August 2019, according to data from Refinitiv.
Real yields also fell in the United States, where yields on 10-year inflation-linked bonds, known as TIPS, fell to -1.092%, the lowest since January.
While the fall in real yields seems at odds with the fact that many central banks, including the US Federal Reserve, are set to end the pandemic-era monetary stimulus, the European Central Bank should be one of them. of the last to do so, Chef Christine Lagarde, it is too early to speak of fraying.
(Reporting by Yoruk Bahceli; editing by Sujata Rao)