Investors rush to sell government bonds in anticipation of soaring interest rates: analysis
Summary
- Policymakers from both central banks were united in their resolve to bring inflation back to target at last week’s Jackson Hole economic forum
Eurozone government bond yields are rising sharply as investors race to sell bonds after policymakers at the European Central Bank and the Federal Reserve asserted their determination to fight inflation by raising interest rates at a rapid pace.
Policymakers from both central banks were united in their resolve to bring inflation back to target at last week’s Jackson Hole economic forum.
This has led markets to shift towards pricing interest-rate rises of 75 basis points in September in both the U.S. and eurozone, up from levels closer to 50 basis points previously.
Money markets are pricing in around 66 basis points of interest rates rises for both the Fed and the ECB at their respective September meetings, according to Refinitiv.
In response, the 10-year German Bund yield rose above 1.50% on Monday, for the first time in two months, up 12 basis points on the day, according to Tradeweb.
“Markets are focusing on discussing the message of ‘coordinated tightening’ from Jackson Hole," Lars Sparreso Lykke Merklin, senior analyst at Danske Bank, said in a note.
The ECB and the Fed appear to have re-committed to creating price stability and yields are shooting higher, he said.
In a keynote speech on Friday, Fed Chair Jerome Powell said the central bank would continue raising interest rates and hold them at a higher level until it was confident inflation had been brought under control.
“The speech was hawkish and we would expect yields of government debt to continue to rise," said Sandra Holdsworth, head of rates at Aegon Asset Management, in a note.
ECB Executive Board member Isabel Schnabel said in a speech that central banks must communicate a strong determination to bring inflation back to target quickly and should not pause at the first sign of any favorable shift in inflationary pressures.
Nicolas Forest, head of fixed income at Candriam, said rate increases of 75 basis points are an option for both the Fed and the ECB.
“Central banks have not finished the fight against inflation," he said in a note.
A source story by Reuters over the weekend added to expectations of a bigger ECB interest-rate rise in September, saying that some policymakers want to discuss a 75 basis-point increase.
Candriam’s reaction to prospects of higher interest rates is to be short duration in bonds to mitigate exposure to risks of interest-rate rises, and to be defensive on corporate bondsand Italian government bonds, Forest said.
The initial estimate for August eurozone inflation is due for release on Wednesday. Economists anticipate headline annual inflation to be 8.9%, unchanged from July, and annual core inflation of 4.1%, up from 4.0% previously, according to The Wall Street Journal’s poll.
This story has been published from a wire agency feed without modifications to the text
