Monthly Bulletin July 2009 - Banque de France

ECONOMIC
AND MONETARY
DEVELOPMENTS
Monetary and
financial
developments
months of 2009. However, for some countries with credit ratings lower than triple-A, spreads
widened again. This might reflect continued elevated risk aversion among investors in the bond
market and concerns about the fiscal sustainability of increasing government debt (for a longerterm
perspective on developments in intra-euro area government bond spreads and their US
counterparts, see Box 2).
Yields on euro area long-term inflation-linked government bonds declined somewhat in the course
of June. Both at the five- and ten-year maturity, real yields declined by around 10 basis points to
1.0% and 1.8% respectively on 1 July (see Chart 12). The five-year forward real yield five years
ahead decreased somewhat compared with end-May, to 2.6%.
The stronger decline in nominal long-term yields than in real long-term yields is reflected in a
decrease of long-term break-even inflation rates. The ten-year spot break-even inflation rate
declined by 10 basis points to 2.1% on 1 July, while the five-year spot break-even inflation
rate remained close to the 1.8% observed at the end of May (see Chart 13). Hence, the implied
five-year forward break-even inflation rate five years ahead fell significantly by almost 20 basis
points to around 2.4% on 1 July. By contrast, the five-year forward inflation swap rate five years
ahead increased somewhat to 2.6%. Accordingly, the gap between the two indicators of long-term
inflation expectations widened, reflecting differences in liquidity premia in the markets for inflation
swaps and the bond market, as well as supply and demand imbalances.
The development of the term structure of forward rates in the euro area shows how the overall
behaviour of euro area long-term yields can be decomposed into changes in interest rate expectations
(and related risk premia) at different horizons (see Chart 14). The implied forward overnight
interest rate curve for euro area government bonds flattened moderately in late June compared with
Chart 12 Euro area zero coupon
inflation-linked bond yields
(percentages per annum; five-day moving averages of daily data;
seasonally adjusted)
Chart 13 Euro area zero coupon break-even
inflation rates
(percentages per annum; five-day moving averages of daily data;
seasonally adjusted)
five-year forward inflation-linked bond yield
five years ahead
five-year spot inflation-linked bond yield
ten-year spot inflation-linked bond yield
five-year forward break-even inflation rate
five years ahead
five-year spot break-even inflation rate
ten-year spot break-even inflation rate
3.2
3.0
2.8
3.2
3.0
2.8
3.2
2.8
3.2
2.8
2.6
2.4
2.6
2.4
2.4
2.4
2.2
2.0
1.8
2.2
2.0
1.8
2.0
1.6
2.0
1.6
1.6
1.4
1.6
1.4
1.2
1.2
1.2
1.0
0.8
July
Sep. Nov. Jan. Mar. May
2008 2009
1.2
1.0
0.8
July
0.8
0.4
0.4
July Sep. Nov. Jan. Mar. May July
2008 2009
0.8
Sources: Reuters and ECB calculations.
Sources: Reuters and ECB calculations.
ECB
Monthly Bulletin
July 2009
27