The ECB is expected to raise interest rates for the first time on Thursday, and bond yields have appeared to be positioning themselves for this move for several months now. The situation looks very different from the tightening that began in 2022 in the wake of inflation triggered by the war in Ukraine and lasted for over a year. Market experts anticipate more modest adjustments in the near future, and the fact that government bonds, starting with BTps, have already priced in these moves could make them particularly attractive, especially for short- and medium-term maturities.
Technically, there is no direct link between ECB rates and government bond yields. The ECB’s cost of money (deposit rates and the refinancing rate) directly affects the banking sector, but it goes without saying that Frankfurt’s monetary policy indicator acts as a barometer that has a knock-on effect on the entire financial sector.
There are few historical instances of monetary tightening in the eurozone. “The most recent one,” explains Luca Cazzulani, head of strategy research at UniCredit, “was in 2022 and 2023, when there was a reaction in the form of a widening of the spread on the BTp, albeit a fairly moderate one, coinciding with the start of the rate-hiking cycle. The widening of the spread began three months ahead of the ECB’s decisions. Even in recent months, following the outbreak of war in Iran, the spread has widened, albeit to a more modest extent than in 2022.” In 2022, the country’s situation was somewhat different; with a lower credit rating than now, the spread hovered around 150 and peaked at 250 in September 2022, after which a long decline began. “What has happened in recent months,” adds Cazzulani, “has been a modest movement. The improvement in the sovereign rating has made foreign investors more confident; furthermore, compared to 2022, there have been further signs of political cohesion in the eurozone.”
The ECB’s refinancing rate stands at 2.15% and the deposit rate at 2%. The market is expecting a quarter-point rise in interest rates on Thursday. The yield on two-year BTPs, for example, stands at 2.9% today, compared with 2.2% at the start of the year. The feeling is that the market has already priced in much of Frankfurt’s future action. ‘Our view,’ concludes Cazzulani, ‘is that three rate hikes are already priced in for next year; pricing in further hikes would require the creation of additional stress. The market is already pricing in this scenario, and so intermediate maturities (such as 5-year bonds) may become more stable.”
Francesco Castelli, head of fixed income at Banor, also points out that the current situation is very different from the tightening that began in 2022. ‘Clearly,’ explains Castelli, ‘Italia is more indebted than Germany and, when rates rise, it must pay close attention to the quality of its debt; however, investors’ perception of our country—which influences spread movements—is currently positive, and this promotes greater stability in yields. It is also true that not all rate rises carry the same weight.”