The yield on German 10-year government bonds moved into positive territory on Wednesday for the first time since 2019 according to the latest indications, the markets are not convinced that the ECB can maintain its position “lower for longer” on the interest rate.
Continued inflationary pressures are undermining central bank arguments that the problem is temporary and rising prices in Germany have created a headache for the country’s new chancellor, Olaf Scholz, who took office in December after 16 years of Angela Merkel at the helm..
Ireland’s latest inflation data showed costs rising at the fastest rate in 21 yearswhile in the United Kingdom, the rate of inflation was confirmed at its highest level since 1992.
These UK figures prompted money markets to price a quarter point rise in the bank of england at its meeting on February 3.
There is growing speculation that the United States will raise interest rates by half a percentage point in March – a rise that would be on a scale not seen in 2000 and which is already prompting a revision how risk is assessed through Financial markets.
This ranges from investors’ exposure to mainstream borrowers via mortgage-backed bonds and banks to the ability of investment appetite for risky assets, from crypto bonds to junk bonds, to sustain if yields are rising on traditionally safe bets like government bonds.
The yield, or implied cost of borrowing, on Irish 10-year government bonds has risen in line with the German benchmark, at just under half a percent.
Benchmark US Treasury yields look set to rise above 2% as traders bet on faster policy tightening from the Federal Reserve and other major central banks, including the Bank of England.
Ryan McGrath of Cantor Fitzgerald in Dublin said borrowing costs remained low by historical measures, but said the interest rate environment is becoming more complex.
“The US Fed and the Bank of England appear to be at the start of the interest rate hike cycle, possibly as early as February in London, but the ECB continues to insist that peak inflation will pass – especially the energy element – and indicates it will not raise interest rates this year,” he said.
Whichever central banks are right in their assessment means that what had been a consensus between those central banks is over, he said.
Rising borrowing costs in the euro zone reflect some spillover from other markets as well as speculation by some that the ECB will be forced to act to calm inflation sooner than its guidance continues to suggest, a- he declared.