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Yield curve slope highest since 1996, notes ECB Back  
In its August monthly bulletin, the European Central Bank commented on the steepening in the yield curve for euro interest rates. It noted that by 5 August the average level of euro area 10-year bond yields stood at just over 5.1%, which was more than 120 basis points higher than the levels seen at the end of 1998.

‘The yield curve slope reached more than 240 basis points by 5 August’ when measured as the difference between 10-year government bond yields and three-month money market interest rates.

‘This is the highest level reached by this measure of the yield curve slope since the summer months of 1996 and it is around 180 basis points higher than the levels seen at the end of 1998’, said the ECB.

‘Developments in this curve suggest that much of the increase in the yield curve slope was due to increases in interest rate expectations for medium and longer-term maturities, which would tend to suggest that market participants may have revised upwards their expectations for the pace of economic activity.’

The Bank also noted that movements in short-term interest rates may be regarded as reflecting expectations that these rates ‘would be more likely to rise in the year 2000 than in the course of the next few months’.

‘This market expectation was also visible in EURIBOR interest rates implied in futures prices. The three-month interest rate implied in the futures contract maturing in September 1999 increased only marginally in the course of July, while the corresponding interest rates for futures contracts maturing in December 1999 and in March and June 2000 edged up by between 26 and 41 basis points, to stand at 3.33%, 3.42%, and 3.71% respectively on 5 August.

The ECB further noted that ‘the futures rate for December 1999 appears to be affected by market expectations with regard to the potential impact of the Year 2000 century date change’. (see table on page 4).

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