Investors are under the spell of inflation and recession worries.

In an interview with the FAZ, Ersen Ustaoglu, who is responsible for the sale of interest rate and currency products to institutional investors in Deutsche Bank's investment bank, evaluates the situation.

the fluctuations on the bond markets are enormous and among the largest since the financial crisis.

Unlike then, interest rate moves of 1.2 percentage points are not occurring in a dysfunctional market where trading is disrupted by the mistrust of many investors.

"The problem now is the great divergence in the assessment of further developments by market participants," says Ustaoglu, whose customers include pension funds, asset managers and insurers.

Markus Fruehauf

Editor in Business.

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In the United States, Deutsche Bank expects a recession in the coming year with a probability of up to 60 percent.

A downturn cannot be ruled out in Europe either.

For Ustaoglu, much depends on the reactions of the central banks.

According to forecasts by Deutsche Bank, the American Fed will raise the key interest rate level in the course of 2023 from a current peak of around 1.5 percent to 4 percent or even a little more.

The European Central Bank (ECB) is likely to increase the deposit rate to 2 percent during this period.

According to Ustaoglu, unlike the Fed, it must also take account of monetary policy transmission, i.e. the monetary conditions in countries with high national debt.

"It was a clear signal from the ECB that

For him, the risk of the European economy is currently in the gas supply.

A failure of Russian supplies would have serious consequences.

This is also reflected in the currently weak euro.

In addition, institutional investors currently prefer to keep their liquidity in dollars.

Here, a return of 3 percent can currently be achieved with risk-free securities.

"Everything that is not currently invested in dollars is considered risky by many institutional investors," says Ustaoglu.

The dollar will continue to be in demand as the situation in Europe is considered uncertain due to the uncertain energy supply.

Challenging Environment

The environment is very challenging for institutional investors with the euro as their home currency.

Ustaoglu refers to the life insurers: The price losses associated with the turnaround in interest rates on the bond market had a significant impact on their balance sheets.

"If they still had hidden reserves of 15 percent at the end of 2021, this turned into hidden losses of almost 5 percent in the first six months." Recently, Ustaoglu has observed that insurers outside Germany have increasingly invested in bonds with a term of 15 to 30 years.

The price losses of long-dated titles were very high, so that their entry levels are now considered attractive by some addresses.

The bond market is currently trying to find an equilibrium.

In the first few months of the year, the development was still being driven strongly by concerns about inflation.

Now the focus is on the possibility of a recession.

That is why bond yields have recently fallen significantly again.

"Our customers are currently very interested in products that benefit from the volatility on the interest rate market," reports Ustaoglu.

According to him, this includes titles that have variable interest rates or inflation protection.

However, there is not just one product for hedging against inflation.

It depends on the portfolio and the mix.

"We are observing that institutional investors are also reducing the complexity of their bonds."

The markets have misjudged the geopolitical risks in recent years.

However, their probability of occurrence is higher than previously assumed.

“The markets will remain volatile,” expects Ustaoglu.