Short-term government borrowing costs in the eurozone hit an eight-year high on Thursday after central bank officials said they could raise interest rates as early as July, boosting bets on the end of negative returns later this year.
The yield on German two-year bonds – a benchmark for the whole of the eurozone that closely tracks expectations for interest rate developments from the European Central Bank – climbed 0.1 percentage point to rise to 0.16%, its highest level since 2014. Longer-dated bonds were also hit, with Germany’s 10-year yield up 0.07 percentage points to 0.93%.
In the UK, short-term government bonds also came under pressure, with the two-year gilt yield hitting its highest level since 2009 at 1.63%.
The moves came after ECB Vice President Luis de Guindos said in an interview with Bloomberg that the central bank’s first interest rate hike since 2011 could come as early as July. His colleague Pierre Wunsch said in a separate interview with Bloomberg that the ECB could raise policy rates above zero before the end of 2022, ending eight years of below-zero rates in the eurozone.
The change in communication rattled markets, which as recently as the start of the year were expecting the ECB to tighten monetary policy more slowly than its British and American counterparts.
“Four months ago, [Christine] Lagarde said they are very unlikely to raise rates in 2022 and now we have . . . governors talking about a rate hike in July,” said Bastien Drut, chief macro thematic strategist at CPR Asset Management. “Everything has changed,” he added.
Derivatives markets expect the ECB deposit rate to return to zero by October from the current level of minus 0.5%.
ECB President Lagarde will take part in an IMF panel on the global economy later Thursday alongside Federal Reserve Chairman Jay Powell. Powell and Lagarde are due to deliver separate speeches on Thursday and Friday, respectively.
Central bankers in Europe and the United States have taken a more hawkish stance as inflation rates hit their highest levels in decades, and they are battling to contain expectations of price growth. A closely watched indicator that tracks market expectations for the euro zone’s inflation rate over a five-year period starting five years from now rose to 2.44% on Thursday, the highest in a decade.
The rise in the Bund’s yield, seen as an indicator of eurozone borrowing costs, came as German exports fell 7.2% in March, according to national statistics office Destatis, in the first set of economic data reflecting the impact of sanctions. against Russia.
In stock markets, the European Stoxx 600 stock index rose 0.4%. Germany’s Dax index gained 1.1%, while London’s FTSE 100 lost 0.1%. France’s CAC 40 added 1.4% following a combative televised debate days before the final vote in the country’s presidential election.
In Asia, Japan Topix added 0.7 percent. Hong Kong’s Hang Seng fell 1.3%, while the Hang Seng Tech gauge fell 3.5% as traders weighed regulatory concerns and the economic implications of China’s Covid-19 lockdowns.
US futures were up early in the morning in Europe, with Nasdaq 100 contracts rising 1%. The broader Nasdaq Composite gauge had fallen 1.2% on Wednesday after Netflix lost nearly two-fifths of its value, hitting other streaming rivals.