Central banks put an end to the euphoria in the rates market

It was almost too good. Rarely has the start of the year been so encouraging on the bond market. Since 1er January, government borrowing rates eased to an unusual extent. The yield on US 10-year bonds fell as much as 60 basis points (bps) to settle at 3.37% last Wednesday. Over the same period, its French equivalent fell by nearly 70 basis points, to stand at 2.45%.

Quite logically, borrowers jostled on the markets to take advantage of the upturn. Worldwide, bond issuance volumes reached nearly $600 billion in less than three weeks, according to Bloomberg. A historical record, at least since 1999, the year in which the agency began to collect this data.

Fight against inflation

On the side of the central banks, this movement was not seen with a very good eye. “To fight against inflation, the major central banks have raised their key rates in order to increase financing costs and thus cool the economy. What is currently happening on the markets is going in the opposite direction”, testifies Stéphane Déo, head of the market strategy at Ostrum AM.

In fact, the decline recorded by bond yields is largely linked to the slowdown in inflation that is beginning to be seen around the world. Investors believed that central bankers were well on their way to winning their fight against rising prices and that they would now moderate or even stop their monetary tightening.

Game over

But since Thursday, both the US Federal Reserve and the European Central Bank have decided to call the end of the game. In Davos, Christine Lagarde recalled that inflation remained too high in the eurozone, despite its surprise drop in December. Especially since “core” inflation (excluding energy and food) has increased. The President of the ECB confirmed that the institution would maintain its rate hike course. Klaas Knot, Governor of the Bank of the Netherlands, even mentioned “multiple increases of 50 basis points”.

On the American side, the same determination. Before entering the period of silence which precedes the next meeting of the Fed, two of its eminent members – Lael Brainard and John Williams – declared themselves clearly in favor of continued monetary tightening. Inflation, even if it is decreasing, remains too high across the Atlantic and the pressure must be maintained, they estimated.


This time, the message seems to have been heard in the markets. In two days, US and European 10-year rates have taken between 10 and 15 bp. “It’s the beginning of a return to reason, notes Stéphane Déo. With an ECB which should a priori increase its deposit rate to 2.5% in February, a German 10-year rate of 2% seems difficult to sustain over time. »

The upward momentum for rates that appeared on Thursday should therefore continue. Without leading to volatility as strong as that recorded in 2022. Firstly, even if the markets turned a deaf ear, the central banks warned them that they were going to continue their tightening at a high pace. This reduces the surprise effect. And then because the prospects of a recession in part of the world and in particular in the United States should strengthen investors’ appetite for government bonds, which are still considered safe havens.

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