Por Abhinav Ramnarayan
LONDON, Oct 28 (Reuters) – Euro zone short-term bond yields soared and long-term inflation expectations hit a new seven-year high on Thursday, putting pressure on the leaders of the European Central Bank. to address the issue of rising inflation when you meet later in the day.
At the same time, the spread between German 10-year and 30-year bond yields was narrowing to its narrowest level since March 2020, pointing to concerns about “stagflation” among bond investors.
The ECB will almost certainly keep its strategy unchanged when it meets on Thursday and will buck rising expectations of an interest rate hike next year, although it could admit that inflation will be higher than expected.
International monetary policy makers are being pressured to re-examine the unprecedented levels of stimulus they have been injecting into the economy in the face of high inflation, as well as the impact it will have on disposable income across the bloc.
“The ECB will have to address the fact that its inflation forecasts are too low without conveying a sense of panic,” said ING rate strategist Antoine Bouvet. “You obviously want to say as little as possible.”
Yields on short-term government bonds were up 4-5 basis points in early European trading ahead of the meeting, with Germany’s two-year Schatz yield hitting a 14-month high at -0.599%.
Other euro area short-term government bond yields were also 4 to 5 basis points higher than the previous session.,
Italy, which is considered to be the country most dependent on the generosity of the ECB, saw its borrowing costs rise between 4 and 6 basis points throughout the public debt curve.
A key indicator of euro zone long-term inflation expectations, the five-year swap rate, opened the session at a new seven-year high of 2.0987%, well above the target of 2% for the euro zone. ECB.
The great challenge for those responsible for monetary policy is the prospect of “stagflation”, that is, an eventual rise in inflation without a corresponding rebound in the underlying economy. Withdrawing monetary support in these circumstances could hurt the businesses that underpin the economic recovery after COVID-19.
These fears are reflected in the bond market in the form of increasingly flat curves, in which short-term bond yields rise much faster than long-term ones.
The spread between German 10-year and 30-year bond yields, for example, is the narrowest since March 2020 – the start of the COVID-19 pandemic – at 29.1 basis points.
“This highlights the market’s concern about rising risks to growth, as central banks are being forced to raise rates,” said Rainer Guntermann of Commerzbank.
(Reporting by Abhinav Ramnarayan; editing by Emelia Sithole-Matarise; translation by Flora Gómez)