Spark Global Limited reports:
The growing number of bonds yielding below zero justifies bullish bets on European bonds.
In the space of a few weeks, the yield on the German 10-year bund went from close to zero for the first time in two years to its biggest fall since early 2020 in July, falling to minus 0.46 per cent. The decline has pushed up bond prices and pushed the volume of negative yielding debt in Europe to 7.5 trillion euros ($8.9 trillion), near a six-month high.
Traders were hurt by a reflation bet that initially sent borrowing costs soaring, but they fell back after major central banks stressed continued support. Meanwhile, the spread of the Novel coronavirus variant has boosted demand for the safest government bonds, reviving the trade that dominated global markets during last year’s outbreak.
Strategists at HSBC and ABN AmRO have been calling since the first half of last year for benchmark bond yields to remain around -0.50% by the end of 2021. That would erase much of the 54 basis points gained from trough to peak this year.
The ECB said last month:
The current surge in inflation is being driven by temporary factors and any shift in stance will depend on achieving the new 2 per cent inflation target, further reinforcing strategists’ confidence.
HSBC’s forecast is “based on the assumption that there will be no rate hikes before the end of 2023,” said strategist Chris Attfield.
“Much of this is now priced in, with the help of the ECB’s new forward guidance.”
New Forward Guidance
Money markets were quick to scale back bets on policy tightening after the ECB revised guidance, saying the CENTRAL bank would not necessarily react immediately if price growth exceeded the target for a “brief” period.
In July, traders cut bets on rate rises by 20 basis points, according to swaps. That was the biggest drop in nearly two years, suggesting they expect the ECB’s deposit rate to remain below zero for five years.
HSBC’s Attfield adds:
“The new forward guidance criteria have not been met since 2008.”
It highlights the formidable challenge the ECB faces as it seeks to remove its record monetary stimulus.
The eurozone exited recession in the second quarter and headline inflation climbed to 2.2% last month. Analyst Maeva Cousin points out:
While intensifying pressures are likely to push the CPI annualized rate above 3% in the coming months, this surge is likely to be temporary, with inflation expected to decline rapidly in early 2022.
According to a Bloomberg survey, strategists expect German 10-year bond yields to fall to minus 0.14% by the end of the year, down from minus 0.035% forecast about a month ago. Given the balance between interest rate expectations and the state of the eurozone economy, AbN Amro strategist Floortje Merten thinks yields will fall sharply back to -0.5%. Merten said:
“Further overvaluation of rate rises and more optimism will be the opposite factors, which could keep Yields near their current lows.”
Reprint indicated source：Spark Global Limited information