(Bloomberg) -- Conviction that the European Central Bank may have missed its window of opportunity to raise borrowing costs is manifesting itself in euro-area bond markets.
Money markets are betting that policy makers will raise the benchmark deposit rate in only June 2020, compared with earlier expectations for a liftoff this year. That is spurring a rally in everything from benchmark German bonds to Belgian and Spanish debt securities.
The ECB’s deposit rate is currently languishing at a record-low of minus 0.40 percent, with forward-rate pricing suggesting that it won’t reach zero until about the middle of 2021. Money-market rates are also signaling that the so-called terminal rate -- which represents the peak in borrowing costs for the current economic cycle -- will be about 0.50 percent and reached in only 2024.
“If the ECB makes the error of postponing rate hikes into 2020, that would mean that the ECB probably does not hike at all this cycle,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “It’s creating a yield-grab environment.”
Money markets have pushed back pricing of a 10-basis-point increase in the deposit rate to June 2020, compared with an expectation of September 2019 three months ago.
German 10-year Bund yields were at 0.17 percent Monday, holding close to the lowest since November 2016. The nation’s bonds have handed investors a dollar-based return this year of about 1.2 percent, compared with 1.8 percent on Belgian debt and 1.7 percent on Spanish securities.
Citigroup Inc., NatWest Markets and Mizuho International all see the chance that Bund yields could drop to zero percent for the first time since 2016 amid a weaker global economic backdrop. Purchasing manager indexes from China, Australia, South Korea, the U.K., Italy and Germany all declined in January.
©2019 Bloomberg L.P.
RECOMMENDED FOR YOU
POPULAR