It is the moment that the central bankers in Frankfurt did not want to hear anything about.

Of which they always pretended, so it couldn't even exist.

Namely, the moment when their most important tool of monetary policy, the government bond purchases, no longer achieve so much.

And what's more, if this option might result in gasoline being poured into the blazing fire.

Soon, however, the oath should come.

Inflation rates are starting to rise sharply in the euro zone, and fear of a return in inflation is spreading.

And that is also causing nervousness among bond investors.

Long-term interest rates have recently risen sharply.

Here the monetary authorities of the European Central Bank (ECB) should actually ensure calm with their bond purchase program and limit the rise in yields with fresh billions.

However, it is also the flood of money from the central banks that fuels the fear of inflation, and this is where the ECB suddenly finds itself in a dilemma.

Source: WORLD infographic


One thing is clear: neither the highly indebted countries can afford higher interest rates, nor are they conducive to the recovery in the euro zone.

The national debt of Italy, for example, has climbed to 2.6 trillion euros.

A rise in interest rates of one percentage point would make debt servicing more expensive by 26 billion euros in one fell swoop.

But higher yields would also cause severe turbulence in the financial markets.

The actors have adjusted to permanently low interest rates and aligned their long-term deposits accordingly.


The interest rate level is crucial for the financial markets, writes the Bank for International Settlements (BIS), the central bank of the central banks, in its latest quarterly report.

"There is a big difference from before: Before this report, investors expected low interest rates for the foreseeable future, while they are now beginning to doubt how long these conditions will last," said BIS Chief Economist Claudio Borio when presenting the report.

"We need to see the financial market outlook in a whole new light," he added.

The valuation of many asset classes depends on the low interest rates, and if these rates change, then the outlook for asset prices will also change.

Source: WORLD infographic


All central bankers are faced with the question of how they can move market expectations in the desired direction.

What happens if the actors suddenly expect the economies to overheat, because after the pandemic people suddenly put their restraint on the table, consume everyone and there is also enough liquidity in circulation that a strong inflation can develop from it.

BIS banker Borio is confident that central banks will avoid such a scenario.

"If the markets really got into a tailspin, the central banks would react accordingly," he said.

The top monetary authorities in Frankfurt have already verbally intervened and stressed that they should keep a close eye on long-term interest rates.

The warnings ranged from ECB boss Christine Lagarde to chief economist Philip Lane to board member Isabel Schnabel.

The French central bank chief Francois Villeroy de Galhau also spoke out in favor of using the PEPP bond purchase program flexibly in order to avoid distortions.

Build wealth

How do you build a fortune properly?

As a WELT reader, you can take part in a free investment check by V-BANK and have your portfolio checked by an independent asset expert without obligation.

Benefit now from a professional opinion.

Learn more

In order to stop the rate hike, the ECB needs to be more active

So far, the ECB has left it with mere verbal announcements.

Last week, the monetary authorities acquired new bonds via PEPP for just over twelve billion euros net.

That was well above the past two weeks, when the ECB had also purchased bonds for around 17 billion euros each.

However, the latest ECB statistics do not yet take into account the purchases made last Thursday and Friday, because processing usually takes two days.

Experts anticipate that the ECB will have to become more active in order to stop the rise in interest rates.

Source: WORLD infographic

"Actions speak louder than words," said Mark Dowding, asset manager at Bluebay Asset Management, the financial service Bloomberg.

"If the ECB is serious and wants to take action against a rise in yields, then it will have to act."

Indeed, investors' fear of inflation is not unfounded.

In Germany, the inflation rate rose to 1.3 percent in February.

That may sound low.

But inflation was above expectations and the trend is clearly upwards.


As recently as December, deflation rather than inflation prevailed in Germany with an annual inflation rate of minus 0.3 percent.

And even in Italy, which suffered particularly economically from the pandemic, inflation is rising.

In February, inflation accelerated from 0.7 percent to one percent.

Here you can listen to our WELT podcasts

We use the player from the provider Podigee for our WELT podcasts.

We need your consent so that you can see the podcast player and interact with or display content from Podigee and other social networks.

Activate social networks

I consent to content from social networks being displayed to me.

This allows personal data to be transmitted to third-party providers.

This may require the storage of cookies on your device.

More information can be found here.

Given these numbers, investor interest in bonds should tend to decline.

Especially since real interest rates in this country are negative for the 58th month in a row, in other words: Investors are making a loss with Bunds after deducting inflation.

Ten-year bonds are currently yielding a real return of minus 1.64 percent.

But equity investors and real estate investors should also keep an eye on long-term returns.

The interest rate is the key parameter for valuing stocks or real estate.

Rising interest rates reduce the present value of future income and thus, in total, the fundamental value of an asset such as stocks or real estate.

Growth stocks react particularly sensitively to changes in interest rates because the companies generate the majority of their income in the future.

But real estate is also sensitive to interest rates because it is almost always financed on credit.

The BIS also points out the consequences of interest rates.

After that, the equity valuations can be justified overall because of the low interest rates.

However, there are definitely signs of exaggeration in individual sectors.

Because of the high volume of IPOs and the high price gains in the first days after an IPO, they are strongly reminded of the dot-com boom of the 1990s.