The European Central Bank (ECB) fixed investors by announcing a 0.5% increase in key interest rates at its February meeting and its intention to do the same at its next meeting in mid-March. This is not one but two increases in key interest rates of 0.5% which are to be expected in the first quarter, for a total of 1.0%.
This will bring its key policy interest rate to 3.5% at the end of the quarter. Subsequently, decisions will be determined by developments in macroeconomic indicators.
At a time when the Fed is slowing down the pace of its rate hikes, this positioning of the ECB suggests a straightforward tightening of the interest rate differential separating the Eurozone from the United States. Enough to carry our currency in foreign exchange markets.
But rising rates are not without consequences. While there is little doubt that it will weigh on demand (and should make it possible to bring inflation under control), the increase in credit will further increase the debt burden on households and businesses.
In addition, given the very high public debt and the amounts that continue to be injected into the economy to help the private sector, the increase in credit will make it more challenging to bear public debt and risk causing turbulence in the bond market. This is all the more the case as the ECB also states its willingness to reduce its balance sheet, reducing the amount of bonds (primarily sovereign debt) it holds by 15 billion per month.
For our part, if we see less bleak prospects than for the euro area in the short term, we think that the return of inflation to the ECB’s objectives is far from being a given, and our economies are not out of the woods.
While we continue to doubt the sovereign debt, the case for HY has evolved in the last months, and we return to EUR HY bonds with a 5% position. On the opposite side, we reduce from 10% to 5% our exposure to JPY bonds. Thus, this position is not because of its yield, which is far below those offered elsewhere, but because of the currency, as we expect the yen to appreciate against the € over the medium and long term.