Economic Situation & strategy
June 17, 2022

Sleeping car versus racing car: monetary policy crashes the bond market

The international bond markets are currently experiencing a memorable development. According to our calculations, never before - at least as far back as our data go - has there been such a crash in bond prices as can be observed at the moment. The cause of the crash on the bond market is the monetary policy of the central banks. For too long, the US Federal Reserve and the European Central Bank had hoped that the strong rise in inflation would only be short-lived and would virtually disappear of its own accord. This misjudgement is now taking revenge as it becomes apparent that the inflation rate will remain far above the target of two percent for a longer period.

The ECB in particular remains in "sleeper mode". Although the ECB Governing Council announced at its last meeting that it intends to raise interest rates in July for the first time since 2011, there will only be a small step of 25 basis points. After that, however, things could move a little faster, so that the main refinancing rate should be 1.25 to 1.5 per cent at the end of the year - if (and that is a big if) the ECB does not decide to take a more timid approach again out of consideration for the countries of the European periphery. Unlike the ECB, the US Federal Reserve has recognised its mistake and has meanwhile ignited the monetary policy turbo. Fed President Powell has thus got out of the sleeping car and into the racing car. By the end of the year, the US key interest rate should be in a range of 3.50 to 3.75 per cent and will be raised to a good four per cent next year.

For the bond markets, therefore, there are still no signs of relief. Although capital market yields have meanwhile anticipated a good part of the expected monetary policy interest rate turnaround in prices, the yield on 10-year US Treasuries should still rise towards four per cent. For ten-year Bunds, yields should still rise to two per cent or slightly above.