In financial markets, government bond yields have fallen significantly in recent months. This was also evident at the first auction in Austria on Tuesday.
Financial markets will be primarily concerned with one topic this year: when and to what extent central banks will cut interest rates. From today's point of view, no one knows exactly, but that does not change the markets' expectations. They expect the first step to cut interest rates in the euro zone to take place in April.
To be sure, the European Central Bank has made progress in combating inflation in recent months. However, euro zone inflation rose again to 2.9 percent in December. Fantasies of lower interest rates are likely to be somewhat “bullish,” as they say in the capital markets. Because with inflation at this level, the central bank in Frankfurt is still far from its 2% target. Also within the European Central Bank, there have recently been attempts to discourage international investors through lip service – so as not to cause too much disappointment.
However, if interest rates actually fall in the coming months, this will of course also have an impact on the national budgets of member states, which traditionally refinance themselves via financial markets. The high level of interest rates led to higher yields on government bond markets last year. These rates have risen across the board and have reached levels not seen in the Western Hemisphere for more than 15 years.
Greg Bittle
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