The tension on government bonds is making itself felt again. Fears about inflation and fears about a possible tightening of monetary policies are pushing BTP yields up again. The focus is on the cost of living trends. Traders fear that the numerous stops in the supply chain and the continuous rise in the cost of raw materials could fuel expectations of a rise in interest rates by central banks.
Yet yesterday the ECB once again dampened fears by confirming the overall budget of the Pepp emergency plan and its duration at least until March 2022. Christine Lagarde said that the economy is still in strong recovery, albeit in slight moderation, and that the inflation will remain high for a long time and then decline over the next year.
The words of the number one of the ECB were not enough and this morning the operators rushed to sell Italy’s debt. In the morning, the yield of the ten-year BTP rose to 1.17%, a level last seen in July 2020. At the same time, the spread returned to the 127 basis points area, on the levels of last January and therefore prior to arrival of Mario Draghi to the government.
For Fabio Castaldi, Investment manager of Pictet Asset Management “for the ECB two hikes (of interest rates, ed.) Are now priced by the end of 2022 and a further three by the end of 2023″. The expert reports that President Lagarde took the opportunity yesterday to reiterate both the thesis of the transience of the inflationary flare in progress, albeit protracted over time beyond the initial forecasts, and the need for monetary policy to support a recovery still not convincing, as evidenced by the slowdown in the activity indicators (SMEs) of the euro area in recent weeks. «The” push back “on the pricing of the markets did not seem, however, totally convincing, with some elements of contradiction during the Q&A – says the expert -. The bond markets remain set down with losses amplified on peripheral government bonds (BTP in the lead), the most vulnerable in this scenario and in the context of the conclusion of the Pandemic Emergency Purchase Program (PEPP) at the end of March ».
It will be important for peripheral markets that at the meeting on December 16, the ECB is able to announce continuity to purchases on peripheral bonds by adequately recalibrating purchases under the app program, in order to avoid an unwanted widening of spreads.