FRANKFURT: A day after the European Central Bank’s (ECB) first interest-rate increase in three years, some of the world’s biggest banks and asset managers are positioning for it to reverse that move.
JPMorgan Asset Management, UBS Group AG and RBC BlueBay Asset Management are among those arguing that swaps markets are pricing too many ECB rate hikes over the coming year, and underestimate the risk that tighter policy will push the eurozone economy into a downturn.
That discrepancy – and the possibility of an eventual ECB U-turn – is creating opportunities to buy short-dated government bonds, they said.
JPMAM, for instance, is bullish on short-dated European government bonds which have sold off in response to the policy-tightening bets, taking two-year German yields near two-year highs.
Swaps pricing eased a touch last Friday as oil prices fell, but still see two more ECB hikes over the coming year, and then for rates to be held steady through 2027.
“The more that the ECB hikes this year, the more likely it will have to cut in 2027,” JPMAM’s global strategist Hugh Gimber said.
UBS strategist Reinout De Bock is betting the ECB will cut rates at least once between June 2027 and June 2028, and has positioned for that outcome by selling three-month Euribor futures expiring in June 2027 and buying equivalent contracts expiring June 2028.
The futures market currently sees less than a 50% possibility of the ECB easing policy in that period.
The ECB’s last Thursday statement did acknowledge growth concerns, lowering estimates for economic expansion in 2026 and 2027. However, the bank still sees 0.8% growth this year, signalling it expects a turnaround from the contraction seen in the first quarter.
The forecasts look too optimistic, Konstantin Veit at Pimco Europe GmbH told Bloomberg Television, adding he was “a bit surprised that there was not much discussion around the growth outlook”.
Still, with inflation running above 3%, policymakers are sticking with a hawkish line for now. Some rate-setters have hinted another rate hike may come as soon as July, arguing that the inflationary fallout from the war is too hard to ignore. — Bloomberg
