The ECB holds rates: is the bond rally sustainable? The ECB holds rates: is the bond rally sustainable? The ECB holds rates: is the bond rally sustainable?

The ECB holds rates: is the bond rally sustainable?

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Markets reject Lagarde’s message that interest rate cuts will not start before summer, provoking a bull-steepening of the Germaneuropean government bond yield curves. Despite the central bank's reluctance to move away from its high-for-longer stance, Europe's bond rally will likely remain sticky throughout the year's first quarter amid intensifying disinflationary trends. Wages and March's ECB staff macroeconomic projections are critical as they will dictate the pace of the cutting cycle ahead. Duration will likely come under pressure in the second half of the year as the risks that the ECB will disappoint market expectations increase and PEPP disinvestments begin.

Following yesterday's ECB monetary meeting, we remain constructive on a bull-steepening of the German yield curve, underpinning duration throughout the first part of the year. European sovereign bonds will likely benefit from disinflationary trends, a revision of the ECB staff economic projections in March, and the beginning of the cutting cycle. Yet, long-term yields will remain volatile and could resume their rise in the second half of the year as the ECB accelerates the pace of QT and markets' rate cut expectations may not be met.

Three crucial points emerged from Lagarde’s press conference:

  1. The central bank is not looking to cut rates before summer.
  2. Stagnation is acceptable. The central bank is not disturbed by the marked deceleration of economic activity in the euro area. The ECB statement mentions signs of improving growth, stressing that an early rate-cutting cycle is unnecessary.
  3. Wages are key. Despite some wage indicators stabilizing, Lagarde signaled that further progress in labour cost is needed to win the fight against inflation, pushing once again against expectations of early rate cuts.

While it is fair to conclude that the stance of the ECB hasn’t materially changed since the December monetary policy meeting, markets are firm in believing that interest rate cuts are likely to come early. Bond futures assign a 70% chance of a rate cut in April, followed by a rate cut at each monetary policy meeting up to roughly 150bps rate cuts by December. Such conviction led to a bull-steepening of yield curves, with 2-year German Schatz yields dropping by 8bps to 2.61% and 10-year yields dropping by 6bps to 2.28% on the day.

Is the bond rally sustainable?

To answer this question, we need to consider the following:

  1. The path for steeper yield curves is set. From now on, every ECB meeting is a live meeting where there is a chance for interest rates to be cut. Therefore, yield curves can only get steeper. The question is whether yield curves will bull or bear-steepen. For the yield curve to bull-steepen, rate-cut expectations need to be met or exceeded throughout the course of the year. If cuts disappoint expectations, there is the risk for yield curves to bear-steepen. That’s why a new set of staff economic projections in March will be critical for markets to assess the central bank’s intention and forecast more accurately the upcoming cutting cycle. We expect a downward revision in inflation expectations in the March ECB staff projections, which support a broad bond rally even if a rate cut is not delivered. In the year's second quarter, the bond rally might lose steam if interest rate cuts do not keep pace with expectations, leaving duration at risk.

  2. Quantitative tightening will accelerate during the second half of the year. The ECB announced in December that in the second half of the year, reinvestments under the PEPP portfolio will be tapered by €7.5bn per month and discontinued entirely at the end of the year. Because the ECB is looking to accelerate the pace of QT rather than decelerating it, it's safe to expect that the monetary policy review, which is due in spring, will lean towards a model similar to the BOE, where liquidity to banks is offered on demand, rather than relying on the central bank’s balance sheet as in the US. Therefore, lacking a deep recession, long-term yields are at risk of adjusting higher in the second part of the year.

  3. A possible economic recovery in China and geopolitical tensions offer an upside risk to inflation. A rebound in price pressures would force the ECB to hold back on interest rate cuts, causing the yield curve to bear flatten.


The Saxo 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 is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo 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 Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning 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. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

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

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 are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.