Home Finance Euro zone bond markets point to stagflation

Euro zone bond markets point to stagflation

Short-dated euro zone bond yields jumped. Long-term inflation expectations hit a new seven-year high. This is by putting pressure on European Central Bank officials for addressing the rising inflation. Meanwhile, the gap between Germany’s 10-year and 30-year bond yields shrank. And this points towards stagflation. The ECB kept policy unchanged.

Policymakers around the world are under pressure to re-examine the unprecedented levels of stimulus they have been pumping into the economy. ING rates strategist Antoine Bouvet said that the ECB will have to address the fact that its inflation forecasts are too low without giving a sense of panic. We can see how it is in its interest to say as little as possible. Short-dated government bond yields jumped between four and five basis points.

Italy saw its borrowing costs rise 5-8 bps across the government bond curve. A key gauge of long-term euro zone inflation expectations, the five-year, five-year forward swap rate, opened the session at a new seven-year high of 2.0987%. The ECB statement did not move markets. The big challenge for policymakers is the prospect of stagflation. Withdrawing monetary support in these circumstances could hurt the businesses, as they are recovering from the pandemic. These fears are being reflected in the bond market in the shape of flattening curves. The gap between Germany’s 10-year and 30-year bond yields, is at its narrowest. Commerzbank‘s Rainer Guntermann said that this highlights market concerns that growth risks are on the rise while central banks are seen forced into rate hikes.

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