The European Central Bank needs to fight rising government bond yields despite the hawks The European Central Bank needs to fight rising government bond yields despite the hawks The European Central Bank needs to fight rising government bond yields despite the hawks

The European Central Bank needs to fight rising government bond yields despite the hawks

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Today's 10-year Bund auction has reinforced our view that the ECB will not have the chance to be hawkish at tomorrow's monetary policy meeting. Although the macro-economic backdrop is improving, the economy remains vulnerable. Lagarde will most likely reinforce the central bank's dovish stance and highlight the importance to keep European bond yields in check. Thus, we don't see an upside in shorting the Bunds yet.

The market focus at tomorrow's ECB monetary policy meeting will be the growing divide between hawks and doves, which poses a threat to investors in terms of the ECB's forward guidance. A stronger-than-expected economic recovery might not warrant further action from the central bank. However, the rising cost of funding in the Euro area remains a problem.

Klaas Knot, the Dutch central bank chief, has recently said that if the economy continues to improve, he doesn't see why the ECB will not gradually phase-out of the pandemic emergency purchases under PEPP by the end of this year to finally end the program in March 2022 as expected. We believe that Knot might be running way ahead of himself for several reasons:

1. The Covid-19 pandemic might not be over yet: despite an acceleration in the pace of vaccination, there is still the probability that another wave may hit the European Union by autumn. It's a risk that the market is not pricing yet because it blindly wants a recovery, which will undoubtedly come but might be choppy.

2. The end of the pandemic might not come together with a full economic recovery. There is the possibility that the PEPP program might be extended beyond March 2022 for the simple reason that the economy will not be fully recovered by the end of this year.

3. It’s unlikely that the ECB will move ahead of the Federal Reserve in terms of tapering. The United States will see a recovery sooner than the euro bloc for the simple reason that monetary e fiscal policies have been working hand in hand. In Europe, fiscal stimulus is lagging, and the money agreed under the recovery fund need to be still disbursed. The Fed expects to taper at the beginning of 2022 at the earliest despite higher inflation and economic expectations. There is no chance that the ECB will move before the Federal Reserve, especially if inflation expectations continue to lag.

4. Tapering means tightening the bloc’s financial conditions, and the European corporate sector is not ready for it. When we speak about rising bond yields in the euro area, we talk about the higher cost of funding for European corporates. While it’s fair to say that a recovery might improve companies' balance sheets, it's also important to acknowledge that the Euro STOXX 600 holds the highest leverage ratio since early 2000. Higher leverage has been possible thanks to the ECB aggressive monetary policies, which reduced significantly borrowing costs. If interest rates suddenly rise, weaker companies relying on capital markets will find it challenging to refinance their debt and risk default.

Source: Bloomberg and Saxo Group.

We believe that the ECB will need to continue to fight rising yields in the euro area because of the points listed above. The central bank will use all the tools in its power to do so, although it will be an uphill battle if US Treasury yields continue to rise.

Bunds are telling us that the ECB will maintain its aggressive stance

Strategists from the Street have been vocal about an opportunity opening up for bond traders: the possibility that the ECB will disappoint the market, providing the perfect opportunity to short the Bunds.

However, we are receiving opposite signals from the market. The bid-to-cover ratio at today's 10-year Bund auction was spot on with the 5-year average. It means that sentiment in Bunds is neither bullish nor bearish.

Source: Bloomberg and Saxo Group.

Throughout the day, sentiment improved considerably, with 10-year yields breaking below the ascending trend channel they have been trading since the beginning of the month.

Source: Bloomberg and Saxo Group

Because European bond yields are falling today, the ECB might not double down the message that it will keep yields in check tomorrow. Yet, a potential selloff will most likely be limited to a correction of few basis points. The worst of the hypothesis is that Bunds test the upper resistance line at -0.21%, representing a change in Bunds' cash price of 0.5%. Hence, we don’t see much upside into shorting bunds ahead of the ECB meeting and remain neutral.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Bank (Schweiz) AG
The Circle 38

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.