The ECB faces a dilemma in 2023. In the fight against inflation, interest rates must continue to rise, but this could pose a risk for heavily indebted countries like Italy.
(Photo: dpa)
Bonds should actually be an anchor of stability, for your own portfolio, but also for the global capital markets. No market is larger than that for government bonds from the major economies. No market is more important to the functioning of the global financial system. No market has a similar importance as a reference for other financial instruments – from mortgage lending to complex derivatives.
However, there was no question of stability on the bond markets in 2022 and the coming year could again be quite unsettled, especially for the euro area.
>> Read here: Germany borrows a record amount
In the past twelve months, the price losses on the bond markets were at times almost as severe as on the stock exchanges, and yields shot up inversely. Bond prices have fluctuated more than they have in decades.
Top jobs of the day
Find the best jobs now and
be notified by email.
If the word “turning point” wasn’t so overused, it would be an adequate description of the turbulence. An index by the Bloomberg news agency, which shows the development of government bonds from the euro area, has fallen by more than 15 percent this year – more than ever before.
The storm on the bond market was triggered by the rapidly rising inflation rates and the abrupt turnaround in interest rates by the large western central banks. Inflation is likely to gradually peak in both the US and the euro zone. The US Federal Reserve and the European Central Bank will continue to raise interest rates, but probably at a much slower pace.
forecast
400
billion euro
Analysts estimate that the euro countries will issue more bonds in 2023 than this year.
That’s basically good news for the bond market, but it doesn’t mean calm will return in 2023. This applies above all to the euro area. While investors in the US only expect an average interest rate increase of half a percentage point, in the euro zone it is 1.3 percentage points. But that’s not the only reason for concern.
Analysts expect that the euro countries will place around 400 billion euros more bonds in 2023 than this year. The ECB is increasingly absent as a buyer. In recent years, the central bank has bonds – above all euro government bonds – acquired for more than five trillion euros.
However, the ECB has not bought any new ones since the end of June bonds more, but only replaces expiring securities, and over the course of the next year the central bank will also restrict these replacement investments.
Investors may gradually get used to the turnaround in interest rates. However, the shrinking of the ECB’s balance sheet is a new element of uncertainty – and such fundamental changes do not usually come without market turmoil.
More: Japan’s central bank shocks the markets with a change of course