Bloomberg: Trillions of negative bonds are disappearing

After another wild week in the global money markets, traders are betting heavily on the biggest regime change in Europe in years: the end of the era of negative interest rates before the end of 2022.

Driven by a storm of aggressive currency signals last week, analysts now predict that the European Central Bank will make three quarterly increases by December – ending an eight-year experiment with borrowing costs below zero. zero that burdened savers with financial repression and helped channel billions of euros into speculative assets.

This creates a huge change in the region’s bond markets, where the negative debt “reservoir” has fallen below those of $ 300 billion compared to the peak they had reached in 2020 ($ 10 trillion).

The immediate cause is the new inflation alarm by five ECB officials in recent days, which has pushed investors to bet a lot on the tightening of the policy.

Market pricing shows that the deposit rate could reach 1.5% by the end of next year, from minus 0.5% today. That compares with price changes in recent weeks, when traders cut bets on interest rate hikes following Russia’s invasion of Ukraine, which shattered growth prospects.

“Falcons seem to have more credibility now,” said Rishi Mishra, a Futures First analyst. “So if the ECB lets go of the idea that interest rate hikes in July are alive, it will allow markets to price closer to 100 basis points by December.”

Deputy Chairman Luis de Guindos, as well as Martins Kazaks and Pierre Wunsch, signaled this week that the first central bank rate hike in a decade could come as early as July, signaling the end of the negative borrowing cost effective from June 2014.

Market-based inflation expectations have moved higher, with oil and gas prices soaring to multi-year levels. A possible ban on energy exports from Russia – from which the European Union supplies 40% of its gas – threatens to boost record inflation.

“Rising inflation to a dead end is a key driver of this age-old debate,” said Frederik Ducrozet, global strategic analyst at Banque Pictet & Cie SA. “Financial conditions were never tight enough, so the hawks had to become more aggressive to reflect this in pricing rising interest rates.”

Exchanges linked to the direction of the euro area harmonized index of consumer prices (HICP) for the next decade are on the verge of surpassing those of the US for the first time since 2009. Strategic analysts at UBS Group AG and Citigroup recommend trades that will yield profits if they continue to grow.

Delicate balance

Nevertheless, the ECB must maintain a delicate balance between growth and inflation as the war in Ukraine rages. Eurozone policymakers’ measured approach to policy normalization contrasts with their Fed counterparts, who have already raised interest rates by a quarter of a unit this year and could add another 200. base by September, according to swaps pricing.

This divergence has weighed on the euro, which slipped to a two-year low this month, and has also been partially contained by the uncertainty surrounding the French presidential election. A run-off vote between incumbent Emanuel Macron and right-wing nationalist Marin Le Pen is set to begin on Sunday.

The ECB forecast for March showed slower economic expansion and faster inflation in 2022, with rising prices falling just below the 2% target in 2024.

Louis Harreau, a strategic interest rate analyst at Credit Agricole SA, expects the war to cause a deep recession in the region deep enough to delay the ECB’s first quarterly increase until December. That said, up-to-date inflation forecasts in June should “scare” all policymakers, which Harreau said could persuade the board to raise borrowing costs in September.

“The hawks are trying to push up the ‘July or September or December’ rate hike so they can be sure they will get it in September,” he said.