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

Senior Fixed Income Strategist

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.


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 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 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.

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 Capital 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.