On the 18th, with Germany's medium and long-term yield rising to a new high in recent three years, major European stock markets fell sharply in early trading. Analysts pointed out that the rise of interest rates in the eurozone market made investors worried about the prospects of the stock market. Due to the strong correlation between us and European sovereign bonds, German bond yields are expected to continue to rise sharply if the euro central bank can not control market inflation expectations.
German long-term government bond yields have been negative since May 2019. Shortly before Christmas, investors bought a large number of safe haven bonds due to fear of the spread of Omicron, which led to the yield of ten-year German Federal bonds falling to nearly negative 0.4%. However, with the significant recovery of US bond yields after the new year, German sovereign bond yields also rose all the way. They once reached negative 0.008% in early trading on Tuesday (18th), which may turn positive at any time.
Given that German government bonds are the most important benchmark for the entire eurozone, a strong rise in their yields will be equivalent to a tightening of monetary policy in the eurozone - offsetting the ECB's goal of maintaining favorable financing conditions. Unlike the Fed, the ECB still intends to stick to its loose monetary policy for most of this year, without reducing its balance sheet or raising interest rates.
However, market interest rate expectations have increased significantly. According to Thomas Altman, a partner of QC investment company, investors currently expect the European Central Bank to raise interest rates twice this year, each by 0.1%; The consensus for the Federal Reserve is that it is expected to raise interest rates at least four times during the year, each by 0.25%.
Rouse caldemogen, fund manager of DWS, a German asset management company, believes that although the yield of 10-year US government bonds was only 1.5 at the beginning of this year, the medium and long-term benchmark interest rate in this market is likely to rise to 3% this year. This may also lead to the rise of interest rates in the European market and the weakness of the euro against the US dollar. The former will make the ECB very uneasy.
Holger Schmidt, chief economist of Berenberg, a German private bank, said: "the rise in the yield of US sovereign bonds also affects us. It is expected that the yield of ten-year German Federal bonds will rise to at least 0.3% by the end of this year."
Martin Luc, chief investment strategist of BlackRock German speaking area and central Europe, an American investment management company, also holds a similar view: experience shows that the yield spread between ten-year government bonds of the United States and Germany will not expand by more than two percentage points. On Tuesday, the spread was 1.83 percentage points.
The expert predicted that the yield of U.S. ten-year Treasury bonds will climb to 2.5% this year, and the yield of federal bonds with the same term may rise to 0.5%, which significantly enters the positive interest rate range.
Luc believes that the key to the development of U.S. yields depends on the rise of long-term inflation expectations. He predicted that when the temporary bottleneck in the supply chain subsides, the current high inflation rate of 7% in the United States will fall to about 3%, which is unlikely to return to below 2%.
Constantine Witt, head of European portfolio at the US The Pacific Securities Co.Ltd(601099) investment management company, believes that the European Central Bank still has the opportunity to prevent the rise of US interest rates from triggering a chain reaction in the eurozone. Because as early as 2013, when the US market interest rate rose significantly due to the Federal Reserve's pursuit of monetary policy contraction, the European central bank sent a long-term loose monetary policy signal through the "forward-looking guidance" of monetary policy, successfully guided investors' expectations and prevented the eurozone market interest rate from following the sharp rise of the United States.
The expert also predicted that the yield of 10-year German bonds will not turn positive this year, and the interest rate spread between heavily indebted countries such as Italy and Spain and Germany will not rise sharply. An important premise of Witt's view is that the inflation rate in the eurozone will fall below 2% by the end of the year.
Analysts pointed out that even if the yield of the euro area does not rise with the United States, the interest rate spread between the two currency areas will expand, which will further weaken the euro exchange rate and push up the risk of imported inflation. Moreover, the European Central Bank raised its inflation expectation for 2022 (3.2%) by an alarming margin last December, which made investors more doubt the accuracy of the expectation that the medium-term inflation is below 2%. This also led to the central bank's monetary policy guidelines can not effectively control the market's interest rate increase expectations.
In early trading in Europe, the DAX index, the German benchmark stock index, and the pan European Stoxx 50 index, the European benchmark stock index, both fell by more than 1%.
Altman pointed out that with the rise of interest rates, the cost of capital will rise, while the profit margins and profits of many companies will decline. This is the reason why stock prices will fall when interest rates rise. However, the response of German stock market to interest rate changes will be less sensitive than that of U.S. stocks, because there are far fewer highly indebted growth listed companies in Germany than in the United States.
