Markets face the biggest policy ‘turn’ in history

Of Eleftheria Kourtali

The yield of the Greek 10-year bond is now moving above 2% and at the highest levels of the last two years almost, having even more than doubled and jumped by 140% compared to the levels of the beginning of 2021 when Greece had entered the markets with a new 10-year and with a yield close to 0.8%, while the spread has expanded to 186 basis points.

Meanwhile, the yields of the German 10-year are moving at three-year highs and positive ground (0.17%), while all yields on German bonds from 5 years and below have returned to positive, with the 5-year in particular returning to positive for for the first time in four years.

In addition, no 10-year government bonds internationally have positive yields anymore, at the end of 2020 2021, 2/3 of government bonds in the euro area had negative yields, while the basket of bonds with negative yields worldwide had fallen to 7.5 τρισ. dollars, and in much less than half of the 18.4 trillion. dollars that were observed at the end of 2020, and at the same levels as in 2018.

The above are the “results” of the central bank monetary policy shift towards normalization, necessarily due to the spike in inflation, with the Bank of England having returned to the “attack” already in December having doubled interest rates, and The Fed has signaled the start of its interest rate hikes from next March. The era of very cheap money, created by the political response to the pandemic, is clearly a thing of the past, with investors now having to weigh their strategy and adjust their “bets” to the new environment of higher interest rates. And they do, sending bond yields to levels that are virtually erasing all the benefits of pandemic support measures.

Morgan Stanley noted that markets are now facing “the biggest quantitative easing in history” since May, with G4 central bank balance sheets shrinking by $ 2.2 trillion over the next 12 months. “We anticipate that the ECB’s balance sheet will shrink faster than that of the Fed from May 2022 to May 2023,” said Morgan Stanley.

The ECB is clearly behind these central banks with Lagarde saying yesterday in a strong tone that the comparison with the Fed should finally stop, explaining that in relation to both the US and the UK, the financial data in the eurozone are completely different.

However, while the ECB’s monetary policy statement yesterday remained virtually unchanged from December, Lagarde adopted a dramatically more aggressive tone in the press conference, showing that the ECB “hawks” have done their job and are now on the table. the faster reduction of quantitative easing, which of course leads to interest rate increases. It is no coincidence that major investment banks with their report barracks from yesterday – including Deutsche Bank, BofA, Citigroup, Capital Economics, ING – changed their assessments of the ECB’s monetary policy after Lagarde’s press conference yesterday. stressing the change in the tone of the head of the central bank, from the mild one he adopted until December to a clearly more aggressive one, while he avoided several times repeating the phrase of December that the interest rate increases this year are “very unlikely”.

The conclusions of Lagarde’s statements were the icing on the cake for eurozone bond yields, which have long been on the rise due to the tightening of international monetary policy. The head of the ECB yesterday tried to appear reassuring about the rise of yields in the eurozone, stressing that the ECB is monitoring them, but the fact that the spreads have not widened significantly, is a positive sign. “We have no reason to believe that this picture will change. However, if it does, we will obviously respond and we have all the tools, all the means and the sufficient flexibility to do so, if justified,” he said.

The fact remains, however, that spreads may not have grown as aggressively as yields, although for many countries they reach 2-year highs, but borrowing costs have more than doubled in one year. And the question is whether the countries are… twice as strong as they were 12 months ago to cope, at a time when this year their presence in the bond markets will be quite strong, with even less support from its markets. ΕΚΤ …