ECB Raises Key Rates 50 bps vs 25 bps Expected Approves Transmission Protection Instrument

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    Helmholtz Watson

    European bond yields sharply higher after ECB’s June meeting, with the yield on the 10-year Bund rising to 1.45% and its French counterpart surpassing 2%, both at 8-year highs.

    Projections of higher borrowing costs led to even more aggressive bond sell-offs for states with higher debt, with the Italian 10-year BTP jumping 25bps to 3.7%, enough to widen the closely-watched spread with its German counterpart to over levels not seen since May of 2020.

    Italian 10 year yields are up 17.9 basis points today and 260 basis points since December. Borrowing at 3.6% for Italy’s government rather than 1% is an enormous difference in total costs.

    Greece 4.15% on new 10-year borrowing, up 16.3 bps today.

    German yields have moved up as well but the spreads are widening. Today German 10s are up 5.2 bps.

    Helmholtz Watson

    Goldman Sachs: Expect ECB will 25 basis point hike in July and raise rates by 50 basis points in September and October

    Goldman cites the recent euroibor flow that has seen an option put play which would profit from 25bp hike in July followed by 2x 50 hikes in September and October.


    Lagarde Opening Statement

    We will make sure inflation gets back to target over the medium term
    High inflation is a major challenge
    Conditions are in place for economy to continue to grow
    “inflation pressures have intensified”
    “inflation will remain undesirable elevated for some time”
    Governing council will retain optionality
    Initial signs of inflation expectations above target warrant monitoring
    The war is a big downside risk to growth
    Wage growth has started to pick up
    War and pandemic in China has made supply bottlenecks worse
    Near term activity is to be dampened by high energy costs
    If demand were to deteriorate it would dampen prices
    Risks to inflation primarily tilted to the upside
    Prices rises are becoming more widespread


    Lagarde Q&A:

    If necessary, we can deploy new instruments to tackle fragmentation
    Decision was ‘unanimously approved’
    Says July and Sept will be ‘first steps’
    We have a sequence in place and want to be predictable
    Did not discuss neutral rate
    A lot of discussions in the past 11 years were about too-low inflation , now we’re in the opposite situation
    Three-quarters of our forecasting error is largely attributable to energy prices, much of the rest is due to bottlenecks that lasted longer than anticipated
    “we are now on our path to exit negative interest rates soon… it is good practice… to start with an incremental increase that is sizeable and not excessive… we also want to observe how markets will operate”
    We are not seeing wages spiraling
    We will not tolerate fragmentation that will


    The spread between Italy’s 10-yr yield and Germany’s 10-yr yield widened to its highest level in over two years, reflecting growing worries about the Italian economy.


    European Central Bank holding an emergency meeting today to discuss ways of dealing with fragmentation in the eurozone.

    Italian debt has recovered its losses from the past two days in response to the news.


    ECB Lagarde Speaks Around Emergency Meeting:

    Crises are never the same twice, must have courage to act when facts are not clear
    Cannot just be bold, must be consistent too
    Must be true too spirit and not just letter of mandate

    Helmholtz Watson

    ECB raised key rates by 50 bps in its July monetary policy decision. The market was not totally surprised given President Largarde comments yesterday,
    [See the full post at: ECB Raises Key Rates 50 bps vs 25 bps Expected Approves Transmission Protection Instrument]

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