▷ The first harbinger/commentary on the market implications of the recent ECB reactions from…


04.02.2022 – 20:05

Stock exchanges newspaper

Frankfurt/M. (ots)

The most recent interest rate meeting of the European Central Bank (ECB), including statements by its President Christine Lagarde at the press conference, was really to the liking of all those who, in view of the rise in inflation in the euro zone, have been asking for a rethink and thus a change of course in the ECB for weeks and months, almost like a mantra -Demand interest rate policy. Economists, ECB watchers and market players are almost unanimously of the opinion that the ECB has been waiting far too long, does not recognize the severity of the problem and is being too cautious. The headlines on Thursday afternoon after the press conference could be classified accordingly. The Reuters news agency headlined: “And yet it moves.” Wealth manager Feri was a little more restrictive and said: “And she moves her a bit.” At LBBW, the view was that inflation at the ECB was crowding out Corona. “ECB signals openness to earlier monetary tightening,” found bond giant Pimco. Asset manager Franklin Templeton even stated: “ECB nervous”.

Governing Council worried

What had happened or, more importantly, how did the markets judge what had happened? Lagarde had classified inflation in January as “very surprising”. And this surprise in inflation, according to Lagarde, prompted unanimous concern in the ECB Governing Council. She sees the risks for inflation as pointing to the upside. In addition, when asked, the ECB chief did not repeat her earlier statement that interest rate hikes in 2022 are unlikely. All in all: the days of cheap central bank money are now definitely over. The acknowledgment from the markets: share prices plummeted, after all the driver ‘ultra-loose monetary policy’ is foreseeably gone. Higher key interest rates give the domestic currency a boost: the euro strengthened by more than 1% against the dollar. And if the ECB raises interest rates soon, bond yields in the euro zone will have to rise: ten-year Bunds a good ten basis points up – also a word.

But will there really be any noticeable increases in yields on the bond markets? Skepticism is warranted, for two reasons. Firstly, a technical market factor is always forgotten. Risk-free Bund yields have been in the red for a good decade, starting at the short end of the maturity curve. Many initially thought that negative yields were completely irrational and called for a turnaround in interest rates. But: puff cake! And if asset managers and real-money accounts such as pension funds and insurers can once again pin bond yields in the positive range in the ten-year period, then they will do it – the experience of earlier temporary phases of increase teaches us. Plenty of money remains on the sidelines, and that drives investment, including in fixed income. It is precisely these investments that slow down increases in yields and can even easily reverse them. The Bund market is in one run, and it can go a bit further for now. But then large-scale re-entry with market effects should be taken into account. Green and sustainable finance should also be kept in mind in this context. The Global Sustainable Investment Alliance estimates the global investment volume in this area at 35 trillion. Dollar (the trillion in the German sense). For comparison: The market for federal bonds including Green Bunds has a volume of 1.592 trillion. euros (02/01/2022). There are also conventional systems.

Secondly, the market looks not only at inflation, but also at growth. And how does Christoph Rieger, head of interest rate research at Commerzbank, correctly assess it: The market is likely to have an even stronger eye on the boom-bust risks of an accelerated tightening of monetary policy. According to Rieger, the yield curves are likely to flatten out further, with the shorter euro segment of two to ten years now also likely to be affected. “In the US, we expect an inverted curve between two and ten years next year,” he says. It is well known that virtually every recession has been preceded by an inverted yield curve, ie long-term bond yields have fallen below short-term rates in anticipation of interest rate cuts. The market is thus signaling the expectation of a recession and the monetary policy support that will be required as a result. Almost unnoticed by all the noise, the swap curve in the euro area (exchange of fixed interest rates for variable interest rates) between ten and 30 years inverted on Thursday. That could be a first harbinger.

(Börsen-Zeitung, 05.02.2022)

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