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The European Central Bank (ECB) is expected to adopt its first deposit rate hike only by the second quarter of 2019, according to the latest research report from Scotiabank. Moreover, Italian politics is likely keep BTP yields high in the immediate few months, keeping demand for German bunds elevated.
Euro interest rates have pushed back monetary normalisation and now appear too complacent about longer-term inflationary risks. To be sure, Eurozone economic data have surprised on the downside in the early part of the year.
Further, rates got another tailwind when the ECB suggested that rate increases are likely to come only in summer 2019. These events prompted the market to pare down rate hike expectations with the 2-year/3-month Euribor down to 0.11 percent, from as high as 0.3 percent in January. Similarly, 10-year German yields are back at 0.36 percent (broadly unchanged since the start of the year).
"We now expect 10-year German yields to touch 0.8 percent and 1.35 percent by end-2018 and end-2019 respectively," the report added.
