Trillions of negative-yielding bonds vanish
(Bloomberg) — After another massive week in global financial markets, traders are betting heavily on the biggest regime shift in Europe in years: the end of the era of negative interest rates before 2022.
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Driven by a wave of hawkish monetary signals over the past week, the interest rate swaps market now expects the European Central Bank to raise three-quarters of a point by December – ending its eight-year experiment with sub-zero borrowing costs. He burdened savers with financial repression and helped turn billions of euros into speculative assets.
This radically changed the region’s bond markets, as the negative-yielding debt pool collapsed to the equivalent of less than $300 billion from a peak of nearly $10 trillion in 2020.
The immediate cause: Fresh inflation alarms from five European Central Bank officials in recent days have prompted investors to increase bets to tighten policy – and then some. Market prices suggest that the deposit rate could reach 1.5% at the end of next year, from minus 0.5% currently. This compares to price action in previous weeks, when traders scaled back bets on rate hikes after Russia’s invasion of Ukraine spoiled growth prospects.
“The hawks seem to have more credibility now,” said Rishi Mishra, an analyst at Futures First. “So if the ECB wants to leave the idea of a July rate hike alive, that gives markets license to rate closer to 100 basis points from the hikes by December.”
Vice Chairman Luis de Guindos and members Martins Kazak and Pierre Winch this week sent the message that the central bank’s first rate hike in a decade could come as soon as July, eventually spelling the end for borrowing costs. negative. Since June 2014.
Market-based inflation expectations have risen, with oil and gas prices rising to multi-year levels. A possible ban on energy exports from Russia – from which the European Union gets 40% of its gas – threatens to increase inflation, which is already at a record high.
“Rising levels of equal inflation is the main driver of this hawkish talk,” said Frederic Ducrozet, global strategist at Pictet & Cie SA. “Financial conditions haven’t really tightened enough, so the hawks have had to get more aggressive for that to be reflected in rate hike pricing.”
The trade-offs associated with the direction of the Eurozone Harmonized Index of Consumer Price (HICP) over the next decade are about to surpass those in the US for the first time since 2009. The strategists at UBS Group AG and Citigroup Inc. By trading this will profit if they continue to rise.
European inflation bets about to outpace US bets
However, the European Central Bank will have to maintain a delicate balance between growth and inflation as the war in Ukraine rages on. The measured approach of eurozone policymakers to policy normalization contrasts with their Fed peers, which have raised rates by a quarter point this year and could add another 200 basis points by September, according to the swap rates.
Fed rate bets are turbo as traders see four half point hikes
That divergence weighed on the euro, which this month slipped to its lowest level in two years, also delayed in part by the uncertainty caused by the French presidential election. The run-off between incumbent President Emmanuel Macron and right-wing nationalist Marine Le Pen is scheduled for Sunday.
The European Central Bank’s March forecast showed a slowdown in economic expansion and faster inflation in 2022, with price growth slipping to just below the 2% target in 2024.
Louis Harrow, interest rate analyst at Credit Agricole SA, expects the war to trigger a recession in the region deep enough for the European Central Bank to delay its first quarter-point increase until December. However, the updated inflation forecast in June should “frighten” all policymakers, which Harrow says could persuade the board to raise borrowing costs in September.
“The hawks are trying to push the rate hike in July, September or December, so they can be sure they will get September,” he said.
Economic data includes GDP and inflation across the European region. Markets are also looking forward to the results of the French elections on Sunday
Speakers at the European Central Bank will include Executive Board Member Fabio Panetta, European Central Bank President Christine Lagarde and European Central Bank Governing Council Member Pierre Wanche.
The sovereign offer includes €16 billion in auctions from Germany, Italy and Belgium, according to Commerzbank AG, along with a monthly EU bond auction.
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