Traders are betting for the first time that the European Central Bank will extend its rate-hiking cycle into 2024, leading to a selloff in German debt that took yields to multi-year highs.
(Bloomberg) — Traders are betting for the first time that the European Central Bank will extend its rate-hiking cycle into 2024, leading to a selloff in German debt that took yields to multi-year highs.
Swap-market pricing shows they briefly wagered the ECB will raise its deposit rate to as much as 3.9% in February 2024. Just weeks ago, money-market traders were betting on a peak rate of around 3.5% in July this year. German bonds tumbled, with the yield on 10-year notes climbing to the highest since 2011, while that of 30-year debt reached the most elevated since 2014.
The sudden shift has been triggered by a slew of strong US consumer-price and growth figures, prompting traders to refocus on the stubbornly high inflation in Europe too. Data Thursday will likely show the core inflation rate in the euro-area sticking at a record 5.3% in February, according to economists polled by Bloomberg. With the ECB’s inflation target at 2%, its policy makers are vowing to keep raising the benchmark rate after taking it from -0.5% to 2.5% in the span of seven months.
Gauges of business activity and core inflation are demonstrating “ongoing resilience in the European economy,” Goldman Sachs Group Inc. strategists including George Cole wrote in a note to clients. They anticipate 10-year German yields rising toward their forecast of 2.75% in coming weeks, from 2.57% as of 1:53 p.m. in London on Monday.
“The onus is then on lending conditions to firms, households, and ongoing wage negotiations, to show that the European economy is indeed slowing down sufficiently to bring inflation back towards target,” the Goldman Sachs strategists said.
The ECB is very likely to go ahead with its intention to raise interest rates by 50 basis points when it meets next month, President Christine Lagarde told India’s Economic Times. The account of the ECB’s latest rate decision will be published on Thursday.
“Any sign of hawkishness in the comments would fan expectations of further tightening, while core inflation above 5% would also be a very strong argument for continued tightening,” said Axel Botte, fixed income strategist at Ostrum Asset Management SA in Paris.
–With assistance from Alice Gledhill and Naomi Tajitsu.
(Updates chart and pricing, adds comment in last paragraph.)
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