European Sovereigns

10-year government bonds Increase in sovereign yields driven by rate hike expectations

Sovereign CDS spreads 5-year European sovereign CDS spreads (GER, NL and FR left, IT and SP right)

Sovereigns Europe - Market observation per 8 November 2021 -

European government bonds closely follow US and UK yields

  • European government bond yields increased in Q3 ’21 and early Q4 ’21. The increase was driven by investor concerns around inflation and comments from central banks that they may reduce their support for easing monetary policies
  • Investors have watchfully monitored UK and US sovereign yields. European government bonds closely followed movements in UK government bond yields and US Treasuries in recent weeks, on the back of views shared by BoE and Fed officials

Central banks will not rush a rate increase

  • Early November ’21, the BoE surprised investors and announced to keep interest rates on hold. Furthermore, the Fed announced that the US central bank does not rush to increase borrowing costs
  • The announcements followed weeks of speculation and are contrary to the strong comments shared by central banks in October ’21
  • Both the Fed and BoE said they focus on recovery of the labour markets before considering raising interest rates
  • As a result, investors dropped their expectations for near term interest rate hikes. Simultaneously, European government bond yields decreased sharply to their lowest level in two months

The ECB announced it is very unlikely that it will raise interest rates next year

  • In October ’21, the market priced in a 2022 interest rate hike by the ECB. With a spike in inflation, markets are betting that the ECB will withdraw its easy monetary policy
  • ECB’s policymakers pushed back on the expectation by stating that Eurozone inflation is temporary and will fall next year, and that therefore, conditions for an interest rate hike will not be met
  • European government bond yields decreased again on the back of announcements from the ECB and other central banks, stating that the central bank will not increase interest rates in 2022
  • The November meeting is a stepping stone towards December, when policy makers equipped with new economic forecasts will determine the future of the ECB’s stimulus

The costs of insuring exposure to debt issued by European governments stabilized in Q3 and Q4 ’21

  • CDS spreads of the Netherlands, Germany, Italy and Spain have steadily returned to pre-Covid levels whereas French CDS spreads are still slightly elevated compared to pre-Covid levels
  • European government CDS spreads slightly increased end of October ’21, yet quickly recovered