CM – January bond sales start a big year for the markets

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Greg Ritchie

It’s going to be a busy year for the bond markets, if last week is a benchmark.

Ireland is just one of the European countries looking to sell bonds this month, what for Land has become a traditional January sale.

The National Treasury Management Agency has confirmed plans to syndicate a new government bond this month. It will hold a bond auction in March and sell government bonds in February and March.

Government bonds had their worst start ever, and German bonds followed, pushing yields to their highest since 2019.

Now they are threatening 0 percent rise as traders bet that European Central Bank policymakers must act to contain inflation, which has accelerated to record levels.

The overall theme is one that was predicted by many in 2022 : the revaluation of the markets as inflationary pressures force central bankers. As bond issuance gets under way this month and the political talk sets in, it’s likely to add more volatility and divergence between rates.

« The first week of this new year certainly didn’t disappoint, according to central bank news looking, ”said Gaetan Peroux, strategist at UBS Global Wealth Management. « With every communication and decision it becomes increasingly clear that the normalization plans of most G-10 central banks are progressing further and further. »

The frontrunner is the Federal Reserve with market expectations of at least three rate hikes and a reduction in bonds on its balance sheet. As the ECB’s bond purchases continue, quantitative easing is expected to fall to just over 500 billion euros this year, according to TD Securities, almost half of the 2021 level.

This will be the net euro area bond supply in that 75bn year, including redemptions and quantitative easing,

« Increased duration supply will likely support declining interest rates, » said Pooja Kumra, a senior European interest rate strategist at TD Securities.

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It aims for the German 10-year yields – the only such term below zero in the euro area – to be positive and reach 0.30 percent by the end of the year. The median on a Bloomberg poll is about 0.1 percent, with investors historically wary of getting burned by shorting bonds.

Sub-zero rates have been a common trait in the region for years, and the The prospect of tightening ECB policy is slowly reversing this. The pool of regional bonds with yields below zero has almost halved from its peak in the pandemic period to 4.5 trillion euros last week.

The sell-off of German bonds has been overtaken by the UK. This has pushed the spread between two-year UK yields and corresponding German rates above 140 basis points for the first time since 2019. The widening of the interest rate differential reflects investors’ belief that the Bank of England will outperform the ECB in tightening.

Money markets are now pricing in around 100 basis points of UK rate hikes through the end of this year, compared to less than 15 basis points at the ECB. Investors will increasingly seek these relative interest rate deals as central bank policies vary across the world.

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