The ECB will not abide by markets The ECB will not abide by markets The ECB will not abide by markets

The ECB will not abide by markets

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  We believe that the market is ahead of itself regarding ECB's interest rate hikes expectations. The ECB will most likely keep open the possibility to become less accommodative if inflation remains sustained. Still, it will discard interest rate hikes until 2023. It means short-term rates might tumble, forcing the EUR lower. Don't be fooled: positive German yields will soon be a reality across the yield curve as the central banks prepare to normalize monetary policy. Italian government bonds' honeymoon is over as market volatility remains sustained. We expect the BTPS-Bund spread to widen before resuming its decennial tightening trend.

This week, the market has advanced interest rate expectations in Europe. Money markets began to price 9bps of ECB tightening for July, sending shockwaves in the European sovereign space. Two-year German yields rose above the ECB deposit rate of -0.5% for the first time since 2015, in a sign that tomorrow Lagarde will lean against a rate hike in 2022. To foster such suspicions were the higher-than-expected inflation numbers released this week which showed a monthly pick up of 0.9% in Germany and Eurozone inflation rising to 5.1% YoY.

Source: Bloomberg and Saxo Group.

The ECB finds itself in a challenging position ahead of tomorrow's monetary policy meeting. On one side, it will want to retain the option open to fighting inflation. On the other hand, it needs to avoid igniting a deeper selloff in rates markets.

Therefore, the central bank is trapped. With the Federal Reserve and the Bank of England advancing with aggressive monetary policies this year, the euro area's yields will also rise. Additionally, the PEPP program is ending in March, pulling even more economic support and applying upward pressure to rates. That would cause a natural tightening of financing conditions in the euro area, which the ECB would want to monitor.

Therefore we’ll probably see Lagarde pushing back against a rate hike this year, disappointing on the market's hawkish expectations. We could witness a contained rally in European sovereigns, which could tumble the EUR.

Don’t be mistaken: ten-year Bund yields might have become a memory already this week. Any hawkish or dovish shift of the ECB will be mostly felt by the front part of the yield curve. However, it's undeniable that the whole German yield curve willsettle above 0% as the ECB gets ready to normalize its monetary policy. 

Source: Bloomberg and Saxo Group.

Italian government bonds’ honeymoon is over.

The celebrations for the re-election of President Mattarella were short-lived. After a modest tightening of the BTP-Bund spread on Monday, the spread resumed rising yesterday. It shows that the performance of Italian government bonds does not depend entirely on the national political situation. At this moment, they are more vulnerable to central banks’ monetary policies.

Because BTPS carry a higher beta than peers, Italian sovereigns will suffer the most as volatility in rates markets increases. Therefore, we remain constructive on our view that the BTPS-Bund spread will widen to 160bps before resuming its tightening decennial trend.

Source: Bloomberg and Saxo Group.

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.