The bond market under fire from the Fed and the ECB

The weekend did not help calm the tensions on the bond market. After being heckled by the surprise decision of the European Central Bank (ECB) to accelerate the reduction of its asset purchases, the borrowing rates of European states soared again on Monday. The German 10-year yield jumped 11 basis points in the afternoon to 0.35%, its highest level in more than three years. Its French and Italian equivalents climbed in the same proportions to reach 0.82% and 1.95% respectively.

This new episode of disaffection affecting State debts, after a renewed appetite for safe havens, has its source in the global tightening of monetary policies in the face of inflation. This Wednesday, the US Federal Reserve is expected to announce the first increase in the Fed funds rate – its key rates – since December 2018. Objective: to curb a galloping rise in consumer prices before it spirals out of control.

Inflationary pressures

The US 10-year rate took more than 11 basis points to settle at 2.10%, and largely dragged European rates down in its wake. An increase due not only to the prospect of the Fed’s first tightening, but also to worrying news from China. The first confinements linked to the rapid spread of the Omicron variant – in particular in Shenzhen, the Chinese capital of electronics – raise fears of new supply difficulties. What further strengthen inflationary pressures on the global economy.

But if the monetary tightening of the Fed can be justified, in particular by the sharp increase in the margins of large companies, the attitude of the European Central Bank seems more difficult to understand. Inflation in the euro zone is very largely linked to a jump in energy prices, oil and gas in the lead, against which monetary policy can do nothing. And the second-round effects – a rise in wages to meet the rising cost of living, which in turn reinforces inflation – are still far from visible.

war economy

By nevertheless choosing to fight against the rise in prices, the issuing institute is taking the risk of disrupting growth weakened by the war in Ukraine, higher production costs and new difficulties in the supply chains. “Historically, in a war economy, the roles of fiscal policy and monetary policy are reversed,” says Patrick Artus, chief economist at Natixis. The central bank finances the war effort through monetary creation, and the state curbs inflation through taxation. »

However, by accelerating the reduction of the envelope it devotes to its asset purchase program, the ECB is doing the opposite. According to calculations by Bloomberg, this change in strategy will lead to a fall of 150 to 200 billion euros in support for European states. The latter will then have to find other investors to meet their financing needs, at the cost of a further increase in their borrowing costs.

Rate bets

Especially since this early exit from the anti-crisis measures announced by the central bank has revived bets on a first rapid increase in its key rates. The markets are now counting on a first tightening before September, and at least another by the end of the year.

During her press conference, the President of the ECB, Christine Lagarde, insisted that the program would not necessarily end in June. The central bank will study the evolution of economic economic prospects before deciding. A priori, the same caution should apply to the rise in rates, which should be done step by step.

On France Inter on Saturday, the governor of the Banque de France recalled that the first turn of the screw would not automatically follow the cessation of purchases. François Villeroy de Galhau wanted to reassure, explaining that the ECB was taking its foot off the accelerator so as not to have to put the brakes on the brakes later in the face of inflation. The message did not seem to have fully convinced the markets.

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