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 the highest in more than 11 years.
(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 the highest in more than 11 years.
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.
The readjustment in expectations has been triggered by a slew of strong US inflation and growth figures. Further compounding the move has been the vow by a number of ECB policymakers to continue raising borrowing costs to slow inflation that remains far above their 2% target.
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. 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.
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. These yields rose as much as four basis points Monday to 2.58%, the highest since 2011.
“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 has raised interest rates by 300 basis points since July, taking the key rate to 2.5% this month.
–With assistance from Alice Gledhill.
(Updates with bund yields, chart, Goldman Sachs comment from 5th paragraph.)
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