A drop in European bonds; The ECB convenes for an emergency meeting, may be forced to bring forward the planned interest rate hike. Investors throw in the bonds of Italy, Germany, France, UK; The reason – an expectation of a dramatic rise in interest rates
David Zane, head of the investment department at Franklin Templeton Investment House, recently said that the European Central Bank (ECB) will become more hawkish than capital market expectations and starting next July will start raising interest rates. The ECB held its meeting about a week ago and although it did not raise interest rates it is a sign that interest rate hikes will start in July at a rate of 0.25%. At its June 9 meeting, the bank announced that its asset purchase plan (APP) would end at the end of the month. In addition, the ECB has announced that further increases will come in September onwards. But the markets are not waiting – they are pricing the rate hikes and given the rise in inflation and what is happening in the US they understand that the rate hikes will be a big drama and will hurt the bonds.
There is a direct link between the interest rate and the yield on government bonds. A rise in the central bank’s interest rate means that risk-free interest rates have risen and investors will demand higher interest rates on more risky instruments. Government bonds are by definition a non-risky asset and are traded at a small premium margin relative to risk-free interest rates and yet, given the zero yield on U.S. government bonds, “all pips have tremendous significance. And to match the required yield increase, bonds need to go down. Exactly what happened in the US and here. In our case, the interest rate has risen, and when it comes to raising the interest rate, government bonds have risen. The 10-year fixed-rate NIS bonds are traded at a yield of about 3%, while a year ago they were traded at less than 1%. Apparently only a 25 percent increase in yield, against the background of an estimate that the interest rate will rise by a close rate, in practice it has already risen by 0.5% and is expected to continue to rise by about 1.5%. But for the bond rate it really is not 2%. It is 20%!
These bonds have dropped 20% and this is reflected in a 2% increase in yield. The problem by the way is neither in the theory nor in the application of this expectation in the markets, the problem is that even though the writing was written on the wall, entities held to the public assets that it was clear would incur huge losses. The institutions here, pensions, provident funds and mutual funds, also held such assets in their portfolios and huge hippies.
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