In financial markets, government bond yields have fallen significantly in recent months. This was also evident in Austria's first auction on Tuesday.
Financial markets will be dominated by one topic this year: when and to what extent central banks will cut interest rates. From today's perspective, nobody really knows, but that doesn't change the markets' expectations. They expect the first downward interest rate step for the eurozone to happen in April.
The European Central Bank (ECB) has certainly made progress in combating inflation in recent months. However, inflation in the euro zone rose again to 2.9 percent in December. Interest rate cut speculation may be a little too “bullish,” as they say in the capital markets. Because with inflation at this level, the central bank in Frankfurt is still a long way from its two percent target. Within the ECB, efforts have recently been made to dampen the confidence of international investors through verbal donations – so as not to cause too much disappointment.
However, if interest rates do indeed fall in the coming months, this will certainly have an impact on the national budgets of member states, which traditionally refinance themselves through financial markets. Higher interest rates have driven yields higher in government bond markets over the past year. These reached levels not seen in the Western Hemisphere for more than 15 years.
Greg Beetle
