Make no mistake: European rates will rise despite the European Central Bank Make no mistake: European rates will rise despite the European Central Bank Make no mistake: European rates will rise despite the European Central Bank

Make no mistake: European rates will rise despite the European Central Bank

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Don't be fooled by today's European Central bank's "dovish taper". With the German elections, reality will dawn on investors: rates will inevitably soar regardless of the ECB's monetary policies. We believe that today's mini-rally is the golden opportunity to short Bunds even cheaper.

A "dovish taper" has been delivered to perfection by the European Central Bank. The market was expecting the ECB to reduce the pace of bond purchases under the PEPP but remained uncertain about the surrounding message. The central bank resolved any doubt by putting black on white the following:

The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation[1].”

In essence, the ECB says that rates will need to stay low until the pandemic is finished and the inflation target of 2% is reached. In case financial conditions tighten, thus rates rise, the ECB can still use PEPP’s full envelope or recalibrating it to counteract this trend.

To explain such a dovish decision might be the central bank’s macroeconomic projections which see inflation rising faster than previously expected for 2022 and 2023, yet, well below the ECB’s target.


Bund yields will rise regardless of the ECB’s monetary policies

Although the bond market is complacent with Lagarde's message today, we believe that the ECB will have a tough time keeping European rates in check during the last part of the year. We identify two main catalysts that will contribute to higher rates:

(1) German elections. As per the latest polls, the SPD is leading the CSU/CDU party. Although the greens have lost some support recently, it looks they could be still part of the next government. That should translate into more Fiscal spending, hence more Bund issuance that will push yields higher.

(2) Positive correlation with the US Treasuries. We expect yields to rise in the US and drift yields higher in Europe, too. On one side, if an agreement over the debt ceiling is not reached soon, it will increase the risk of a Quantitative Tightening (QT) in October /November. Indeed, the later a decision is taken, the larger the volumes of Bills the US Treasury will need to issue in a short time to refinance existing debt by the beginning of November. On the other hand, the longer the Federal Reserve delays tapering, the more aggressive it will need to be, provoking a fast rise in yields.

We expect 10-year Bunds to break above 0% by year-end and stabilizing around 0.2%. As a consequence, European Government bonds will need to reprice accordingly. We are particularly bearish Greece, France, Portugal and Spain. We remain neutral on Italian BTPS as we see still scope for the BTPS/Bund Spread to tighten to 75bps by the end of the year. However, it doesn't mean that yields won't rise in Italy, too. We expect them to stabilize between 0.9% to 1%.

Where does that leave us?

We remain of the idea that this is a golden opportunity to take advantage of cheaper valuations to short the bond market, as we have outlined in our recent piece.

Euro-Bund put-options with December expiry, 169 strike and Delta 20 have cheapened considerably and are now pricing at 0.360 while on Tuesday were trading at 0.470.

If you are not comfortable with put options, you can look at ETFs shorting European sovereigns such as:

  • Lyxor Bund Future Daily (-1x) ETF (BUNS:xpar)
  • Lyxor Bund Daily (-2x) Inverse UCITS ETG (DSB:xpar; LYQK:xetr)
  • Lyxor BTP Daily -2x Inverse ETF (BTP2S:xmil)
  • Lyxor BTP Monthly -2x Inverse ETF (BTP1S:xmil)


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.