The European Central Bank (ECB) has delivered and yet disappointed. Higher inflation forecasts make a quick next interest rate hike unlikely. Irrespective of this, corporate bonds continue to be ordered on the Frankfurt Stock Exchange.

7 June 2024. FRANKFURT (Börse Frankfurt). After the central banks of Switzerland, Sweden and Canada, the ECB also lowered its key interest rates yesterday lunchtime. After many weeks of verbal preparation by the Council members, the cut of 25 basis points was no longer a surprise. Instead, the ECB's new inflation forecasts caused movement on the bond markets.
Specifically, the central bank now expects slightly higher inflation rates of 2.5 and 2.2 percent in the eurozone in 2024 and 2025 respectively. The core rate is even expected to rise by 2.8 percent this year. According to Ulrike Kastens, economist for Europe at DWS, the new forecasts indicate “that it could now take longer to reach the inflation target”. She sees this statement as “significantly more restrictive than expected” and therefore expects a “pause in July and further interest rate cuts in September and December”.

Interest rate cut “practically ruled out” before September.

Ulrich Stephan, Chief Investment Strategist at Deutsche Bank, also does not expect another interest rate cut in the summer. He refers in particular to the central bank's announcement that it will continue to act in a data-dependent manner. At the same time, because the ECB staff only issues new forecasts every three months, a further interest rate cut before September is “practically impossible”. NordLB states that the “lower inflation figures expected in late summer will open the door for a further interest rate cut”. Here too, the next interest rate cut in the eurozone is not expected until September.

The bond markets are already preparing for this scenario. Although the yield on ten-year German government bonds has fallen quite significantly over the week, this is solely due to developments in the first three days of trading. After the ECB meeting, including higher inflation forecasts, yields initially rose again. The same was true for the short term, such as the two-year German bond yield, which climbed from its weekly low of 2.97% to 3.04% by the end of the week.

New focus on the US labor market report today

Klaus Stopp from Baader Bank fears that the path towards lower interest rates generally expected by the ECB will not be easy. “Inflation and, above all, wage growth remain a problem”, the trader assesses the situation. Further interest rate cuts are therefore “not set in stone”. Tim Oechsner from Steubing AG is already focusing on the US Federal Reserve. “The focus is now on the USA and the question of when a possible interest rate turnaround could be initiated there”. In his opinion, the labor market report, which will be published this afternoon, is also likely to be decisive for the Fed.

Around the ECB meeting, traders on the Frankfurt Stock Exchange are reporting comparatively quiet business. In the corporate sector, “the usual perennial favorites” are being bought, explains Oechsner, citing bonds with maturities of between two and six years in particular. For example, investors have taken bonds from E.On (XS2747600109), Hochtief (DE000A383EL9), Mercedes-Benz (DE000A3LH6T7) and Siemens (DE000A1UDWN5) into their portfolios. These bonds currently yield between 3.0 and 4.1 percent. Grenke bonds are also still in demand. Oechsner is particularly seeing purchases in a new bond issued at the end of May with a yield of 5.5 percent (XS2828685631) that matures in mid-2029.

Targeted purchases in corporate bonds

On behalf of Baader Bank, Stopp reports interest in bonds on European Investment Bank (XS2587298204) Mercedes-Benz (DE000A289RN6) and Volkswagen (XS1206541366). In addition, as almost always, there is “a bit of a buzz” in the public sector. Investors are increasingly focusing on the short end of the market, where yields still look relatively exciting compared to the long end. On the shopping list are two Bund treasury bonds maturing in June and September 2025 (DE000BU22015 and DE000BU22023), which offer yields of 3.3 and 3.2 percent over the next 12 and 15 months respectively. A bond from Kreditanstalt für Wiederaufbau (DE000A254PM6), which yields 3.6 percent and only matures in February 2025, is also in demand.

Gregor Daniel from Walter Ludwig Wertpapierhandelsbank reports “targeted purchases” in the run-up to the ECB meeting. The focus was on bonds with maturities of between five and nine years and yields of 3.3 to 3.7 percent. Bonds from EnBW (XS1901055472), Mercedes-Benz (DE000A3LH6U5), RWE (XS2584685031) and Sixt (DE000A3827R4) were sought after. “Here, the customer had set a specific buy limit in the market at which he wanted to enter at most,” notes the trader. There is also demand for a Fraport bond with a yield of 4.2 percent until June 2032 (XS2832873355), which has been traded on the stock exchange since today.

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