Interest rates & yields: what the new course of the ECB means

The European Central Bank (ECB) announced a cautious normalization of monetary policy last week.

She does not want to proceed as quickly as the American Federal Reserve (Fed).

Nevertheless, the bond purchases should end in the summer when the situation is up.

And “some time after” interest rates are to be raised.

Slow uptrend

Christian Siedenbiedel

Editor in Business.

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What does this mean for bond yields, which are influenced by numerous factors?

"The economic logic clearly speaks for higher returns," says Holger Schmieding, chief economist at the Hamburg bank Berenberg.

The ECB will stop buying bonds in about six months, and after a major setback by Putin, the economy will pick up again by the summer at the latest: "Although inflationary pressure will decrease again from the summer, it will remain somewhat higher than the ECB expects," says the economist.

This speaks for an increase in yields on ten-year Bunds from 0.38 to at least 0.7 percent at the end of the year.

"The slow upward trend in bond yields has already begun," says Karsten Junius from Bank Sarasin.

"Actually, the turnaround in interest rates even began last year." Since then, inflation expectations on the bond market have risen steadily.

They formed the basis for the ECB to be able to align its monetary policy somewhat more neutrally.

The next thing to expect is rising real interest rates.” These generally rose with higher expectations for monetary policy.

An interest rate level of minus 0.1 percent is currently priced in on the money market for the end of the year compared to minus 0.57 percent today: "One can therefore say that a rate hike of 25 basis points is 100 percent expected and another correspondingly around 80 percent ' says Junius.

Higher inflation expectations and the expectation of interest rate increases have led to the fact that the yields on ten-year Bunds have already risen from minus 0.4 percent at the low point in December 2021 to currently almost plus 0.4 percent.

"We assume that this will result in a longer-term upward trend in bond yields," says economist Junius.

Mortgage rates follow bond yields

Even construction interest rates have already reacted to the increase in bond yields: since the beginning of the year, interest rates on loans with a ten-year fixed interest rate have risen from 1 to 1.7 percent.

"Most experts did not expect this increase in such a short time," says Mirjam Mohr, member of the Interhyp Management Board.

"The main reasons for this are inflation and the expectations of a change in policy by the central banks."

"In view of the signals from the central banks, interest rates on ten-year loans of two percent and more this year are definitely realistic," said Mohr.

In view of the now unexpected speed of development, an even higher increase is also conceivable.

Forecasts are difficult at the moment, but it is very likely that things will continue to go up.

"The uncertainties of the Ukraine war briefly depressed bond yields," says Mohr.

In the case of building interest rates, this only short-term decline has not led to setbacks: "Even after the start of the war, after a very short break, we are seeing again that the interest rate increase for building loans is continuing."