ECB Watch

Bottom line here is that none of this works in isolation to what the Fed and BOE are doing. Recent moves suggest that both the feb rate and the bank of England rate are on their way up. I firmly believe ECB lags both considerably- it did on the way down since late 01, and on the way down before that in summer 2000.

Let’s face it ECB has plenty to go yet if the German cycle continues in the way it should.

Jim Power was on Matt Cooper last night saying he had outlined all these rate rises, oh reallly??

increase in rates looks more and more likely by the day.
currently pricing in for 50bps.

yeilds rise even higher on risk free liquid bonds to 5%+.

who in their right mind would otuch property unless with huge yields on offer … refer=home

It’s developing into a pattern.

Another rise in September is a given, but I expect that by October we’ll be in the exact same position again, with a December rise pretty much certain and a March rise looking more likely by the day.

Rinse and repeat.

ABN-AMRO seem to be the only bank out there actually doing their own analysis rather than following the herd and waiting for ECB code-phrases.

And the ECB could yet surprise the markets with a 0.5% rise, just to remind them about risk. :smiling_imp:

It’s developing into a snowball and a very big one at that :wink:
Merrill Lynch’s Survey of Fund Managers June 2007: Investors braced for Higher Rates as Inflation Fears hit home … 0333.shtml

We’re not even out of first gear yet with regards to interest rates.

How likely are Fed rate cuts with this economic backdrop? Not very i’d say. I think the likes of Austin and Dan were hoping for Fed rate cuts to signal the end of the ECB cycle of increases.

Don’t hold out any hope of seeing 2-3% interest rates again for the best part of a decade guys, if at all.

Do we have any investment bankers on board? If so, I would greatly appreciate an informed commentary on treasury bonds, the current yields and the anticipated effect (if any) on interest rates, particulary in the EU. My understanding is that the Fed may be forced into incerasing interest rates as a result of treasury bond yields - is this correct and, if so, does it apply in the EU?

investment bankers explaining fixed income, that will be the day.

Fed will hold rates or may have a small increase to allay inflation concerns. At the moment they will be quite happy as the defecit is shrinking and economy is still holding up somewhat.

Mid term inflation looks to be on the rise, this in effect will push up rates, or the current expectations of future rates. Rates are inversely releated to the price of bonds, rates rise then the value of previously set fixed income decreases. Prices are inversely related to yields as well, so price is pushed down due to future expected rates, and yields rise as price decrease but income reamins fixed…

Also, factor in the global uncertaininty and amount of leverage in the market, risk and uncertainity makes fixed income more attractive and increases the term premia, pushing prices lower again as investors increase risk prices.

Personally, i see rates rising, yields rising by a smaller amount as uncertainity and inflation concerns increase the current cost of future flows (ie the discount factor). As the world economy slows, the yields will drop slightly and prices to rise marginally on bonds as they become more valuable as the market shifts to a bear stance.

On the whole, fixed income carry and upside benefit but may be currently underpricing the systematic risk in the market place.

ie: will perform better than stocks over mid term but won’t be blowing you away, the safer the better, non mbs, anything carrying counterparty risk or cds exposure should have a lower upside but may not be currently priced into instrument.

Thanks Baby Tooth - I wish I could use the phrase crystal clear but…

My understanding from a conversation yesterday was that the Fed, for example, may have to increase interest rates because bonds were being dumped, arising from the low yields from them - is this correct? What you’ve said seems to suggest the exact opposite?


interest may need to rise to

a. keep down inflation.
b. to sell their bonds close to the par price.
c. to compensate for increase oppostunity costs.

If they may rise future rates, then the current fixed rates on bonds are worth less. If they are worth less then the price drops. If the price drops the yield rises.

There is no exact science.
10 YEAR GILTS (ie bonds paybale on 10 years are used to give an expectation of what inflation will be by taking the current interest rates and the price that the bond will sell at. The higher the price then the lower the implied inflation) All governments want to keep inflation low, so they look at things like these bonds to see what price the market sells them at, and then raises or lowers current rates in an attempt to influence current expectations of future interest rates.

Bear in mind that there is an absoloute mulitude of factors at play here so there is no definitive answer, and after all, its all based on expectations and the premisie that on average the average expectation is what occurs with a zero biasedness…

crystal…hmmmm…not with my explainiation, sorry…

Government bonds are issued by a government when they spend more than they take in (this is the teletubbie explanation). Investors in these bonds will demand a return.

If inflation is rising, bonds are worth less i.e. a 5% bond when inflation is 2% is paying out 3% to the investor, if inflation rises to to 4% the real return is only 1% to the investor.

The investor (in many cases foreign central banks e.g. China) will demand a higher yield on bonds if inflation rises, so making Government bonds more costly to issue. The expectation is that the Fed would raise interest rates to keep inflation low and so making bonds less expensive to issue.

There’s a lot of extra factors at play here - particularly currency issues. You may have heard of the “global savings glut”. In essence much of that is savings built up by Asian countries and oil exporters which are being recycled into buying US government bonds. Because there is so much demand for bonds, bond yields can be low and interest rates can be kept lower than they maybe should be. If foreign central banks start investing outside the US, US rates would have to rise to try and attract the same level of investment.

Cheers folks

or govs can just print more cash, they dont neccessairly need to issue bonds.

They mainly want to control inflation, to do this by reducing money supply, this is caused by issuing bonds. Rates are indicitave of the future risk free cost of money. The nominal amount. Inflation is controlled by forcing cash out of the current market place, of course, as stated there is a myriad or reasons at work here, but at the moment rates are rising as mid term inflation concerns are rising…ccy issues are somewhat removed from this particular scenairo but yet are vital overall in the analysis of fixed income markets

I predict its up up and away for the ECB

Eurozone unemployment has reached a record low of 7%.

McWilliams always said we needed a strong USA and a weak EU. The balance is slowly shifting against us, I wonder when we can expect him to make an appearance again 8)

Most likely, but not yet. 4% it is for now, as expected.

More interesting is the lack of code words - are they actually abandoning that approach, or is the time not right for the ‘scary words’ to appear?

Weren’t market expectations for a 1/4 percent in September, does this mean it will go ahead or wait till November?

4.5% by the end of year might not now happen…

Bloomberg’s take…