After last week's meeting, the European Central Bank (ECB) wanted to avoid giving the markets the impression that it was slowing down the rate hike cycle from 0.75 to 0.50 percentage point.
The ECB has not yet reached its target in its cycle of interest rate hikes, says Konstantin Veit, portfolio manager at asset manager Pimco, a subsidiary of Allianz that specializes in bonds, in an interview with the FAZ
Markus Fruehauf
Editor in Business.
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ECB President Christine Lagarde made that clear.
According to Veit, your messages seem to have caught on in the market.
After the previous rate hike of three-quarters of a percentage point, the markets would have reacted positively, assuming that the end of the tightening was near.
With the increase of half a percentage point that has now taken place, it was the other way around, and there were significant losses on the financial markets.
Significantly rising interest rates
According to Veit, Lagarde has not given many hints as to the possible target of the rate hikes.
However, she mentioned that interest rates still have to rise significantly, to a level that is sufficiently restrictive.
According to Veit, the ECB does not consider the final rate of 3 percent for the deposit rate (currently 2.0 percent) determined by the market before the meeting to be sufficiently restrictive.
"Given the still large uncertainties regarding the dynamics of inflation, we do not have a strong opinion on the pace and size of further ECB interest rate hikes," admits the expert from Pimco.
The fact that the market is currently expecting a final rate of around 3.25 percent does not seem unreasonable to Veit after the latest interest rate hike.
With regard to the announced reduction in bond holdings, the ECB will, in his opinion, take into account the special features of monetary union and the associated problem of fragmentation.
Veit is referring to the problems of highly indebted euro countries like Italy.
He thinks it makes sense to let the mining program run in the background.
"The institutional structure of the euro area of the ECB leaves only limited room for trade-offs between quantitative tightening and interest rates," he adds.
Interest rates are more important for tightening monetary policy and fighting inflation.
The reduction in bond holdings in the United States and Great Britain was relatively silent for the markets.
The risk of persistent inflation
Forecasts are currently very difficult for Veit in view of the uncertainties regarding inflation.
“The markets will therefore remain nervous.
That will only change when there is clarity about inflation.” For the Pimco portfolio manager, there is a risk that inflation will not fall to the level at which the central banks want to see inflation.
The fact that the ECB has increased its inflation forecasts for 2023, 2024 and 2025 is also to be understood politically.
"The forecasts have to match what the ECB plans to do in terms of monetary policy, i.e. justify the restrictive course," says Veit.
Due to the rapid turnaround in interest rates, he currently considers bonds to be much more attractive.
"We rely on high-quality titles," he emphasizes.
These could be Pfandbriefe or loan securitisations as well as bonds from banks and companies from the investment-grade segment.
"We currently see shorter maturities as more attractive than the longer segments." However, there could also be a further sell-off at the short end if inflation proves to be more stubborn and the central banks have to tighten their restrictive course again.
Significantly more government bonds
In the coming year, the states would issue significantly more bonds to finance their crisis programs.
But with the ECB, an important buyer is missing.
The titles would have to be taken up by the market, which normally shouldn't be a problem.
But there could be phases in which this could become more difficult.
In the course of the turnaround in interest rates, Veit has also seen that EU bonds cannot replace federal bonds as a risk-free instrument.
On the one hand, they are not really Eurobonds because they have a partial debtor component.
This means that each of the states is liable for its share of the emission.
In contrast, with joint and several liability, each state would be liable for the entire emission and thus for others.
On the other hand, according to Veit, the EU bonds are not a permanent construct, but were issued once as part of the pandemic programs.
Some of their risk premiums are higher than for France or Spain.
"The interest of the euro countries in such bonds has therefore cooled off noticeably," observes Veit.