(Bloomberg) – Deepening debt pool with sub-zero yields justifies bullish bets on European bonds.
Within weeks, German 10-year bond yields went from flirting with zero for the first time in two years to falling the most in July since the start of 2020, falling back to minus 0.46%. The drop – which pushed up bond prices – helped push the amount of negative-yielding debt in Europe to 7.5 trillion euros ($ 8.9 trillion), near a six-month high .
Traders were fooled by the stimulus bets which initially pushed up borrowing costs, but lost altitude after major central banks stressed their continued support. At the same time, the spread of Covid-19 variants has spurred demand for the safest public debt, reigniting trade that dominated global markets amid the pandemic last year.
The strategists of HSBC Holdings Plc and ABN Amro Bank NV have never shied away from their calls for benchmark bund yields at the end of 2021 of around minus 0.50%, which have been in place since the first half of the year. last. That would erase much of the 54 basis point lead from this year’s low to high.
Their conviction was only reinforced after the European Central Bank said last month that the current rise in inflation was due to temporary factors and that any change in position would depend on meeting the new target of inflation of 2%.
HSBC’s forecast “was based on the assumption that there would be no rate hike until the end of 2023,” strategist Chris Attfield said. “This is now mainly integrated into the market, aided by the new forward-looking orientation of the ECB.”
Money markets were quick to reduce bets on policy tightening after the ECB revised its guidance on interest rates, saying it would not necessarily react immediately if price growth exceeds that target for a period of time. transition period “.
In July, traders erased more than 20 basis points from rate hike bets, according to swap contracts. This is the biggest cut in almost two years and suggests they expect the ECB’s deposit rate to stay below zero in five years.
HSBC’s Attfield added that “the new guiding criteria for rate hikes have not been met at any time since 2008,” underscoring the arduous task the ECB faces as it seeks to unwind monetary stimulus record.
The eurozone emerged from a recession in the second quarter and headline inflation climbed to 2.2% last month. While mounting pressures could push the annual CPI rate to more than 3% in the coming months, the rise is likely to be temporary and inflation is expected to fall quickly in early 2022, according to Maeva Cousin of Bloomberg Economics. .
Strategists see the German 10-year yield at minus 0.14% by the end of the year, down from a forecast of minus 0.035% about a month ago, according to a Bloomberg poll. ABN Amro strategist Floortje Merten predicts a more pronounced decline to minus 0.5%, given the balance between rate expectations and the state of the eurozone economy.
“The further overvaluation of rate hikes and more optimistic sentiment would then be opposing factors and could keep Bund yields around these low levels,” Merten said.
The Bank of England will meet on Thursday, with investors alert to the possibility of a split vote on bond purchases given recent hawkish comments from some members of the Monetary Policy Committee. European sovereign supply is expected to remain subdued at around € 17.5 billion, according to Commerzbank, with auctions in Germany, Austria, France and Spain
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