The European Central Bank hiked rates 50 basis points. Curious about what that means for investors? David Zahn, Head of European Fixed Income shares his thoughts.
Hello, this is David Zahn with your European fixed income update. So, the ECB [European Central Bank] has hiked rates by 50 basis points and they are saying they will hike another 50 in March. I think this is the right thing to do. They need to continue to focus on getting inflation down. But that will probably be the end. They'll probably do 25 or 50 in March because inflation was coming down quite quickly in Europe.
However, the bond markets seem to take it much more, that this is it they're done, and that yields should start declining quite significantly. We think this will probably be seen as inappropriate when we look back on this and that we will see yields retrace over the next couple of weeks back to levels more of what we had before the ECB rate hike. Because they are going to continue to probably jawbone the market, talk about why rates should be higher, and they don't really want an easing happening after they are announcing rate hikes. But with that in mind, we do think that any back up in yields is probably an opportunity for investors to buy duration and really start to extend.
And I think that the ECB will probably be looking at next year thinking about have they hiked too much, should they actually be thinking about cutting rates? But that'll probably be later in the year more toward the end.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Source: ECB hikes rates—one more to come? | Franklin Templeton
