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Surprise: bond sales despite rate cut

Posted by MoneyController on 07.06.2024

The European Central Bank (ECB) lowered interest rates by 0.25%. However, something happened in the bond market that one might not have expected.

What will the ECB's next moves be?

Yesterday's decision by the ECB to cut rates by 25 basis points was expected by the markets. In a way, some analysts have pointed out, it is possible to think that this decision had already been discounted in terms of prices as well. What the markets are wondering about today is, rather, what the next move in monetary policy will be: will the next interest rate cut be soon or will we have to wait many months?

Record sales of European corporate bonds

As Morya Longo pointed out yesterday in ‘Il Sole 24 Ore’, even before the rate cut was made official, Bank of New York Mellon recorded a volume of bond sales not seen for three to four years. These sales concerned, in particular, European corporate bonds. Longo mentions in this respect the analysis of Geoffrey Yu, Market Strategist for Europe at Bank of New York Mellon: European corporate bonds are sold at very high levels, since many market participants believe that the ECB will leave rates unchanged for a long time to come.

High rates for much longer?

The point is that, as Yu's analysis shows, there are fears that persistently high rates could distress some companies and deteriorate the credit market. Against the backdrop of Bank of New York Mellon's sell-offs, the message from credit market participants seems to sound something like this: since it seems that the ECB has no intention of making new rate cuts any time soon, holding European corporate bonds in one's portfolio is on average riskier than in the past.

Eurozone inflation forecasts

One of the reasons why market participants believe that the ECB has no plans to cut interest rates any time soon lies in its upward inflation forecast for the coming months and years: "The latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections. Staff now see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. For inflation excluding energy and food, staff project an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026", reads yesterday's ECB press release. The road to reaching the monetary policy target of 2% still seems a long one.

Read also:

ECB cuts rates by 25 basis points: the consequences for savers

Rate cut coming: last bargains in the government bond market?

Inflation back on Europe's radar?

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