(News Bulletin 247) – Sovereign bond yields eased sharply, with the market pricing in a possible pause from the major central banks in their rate hikes.

The mechanism is classic: when the markets take fright, government bonds, that is to say sovereign debt securities, see their values ​​rise. And their rates fall, since the price of a bond moves in the opposite direction to its yield.

This is the case this Wednesday. As equity markets collapse on Wednesday, gripped by Credit Suisse’s 30% drop, the US 10-year rate is trading at 3.43% from 3.69% on Tuesday, a significant drop on this type of market. In Europe, the 10-year rate for Germany stood at 2.14% against 2.415% on Tuesday and for France it stood at 2.694% against 2.973% on Tuesday.

The changes in two-year securities, which are more representative of expectations of monetary decisions, are even more significant. The yield on German debt at this maturity is 2.49% against 2.873% on Tuesday, for example.

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Central banks under pressure

This easing of rates can have several reasons. First of all, sovereign bonds can benefit from their status as assets deemed safe, and shifts in allocations from equities to these bonds can take place. This is called “flight to quality”.

But above all, in the opinion of several experts, the fall of Credit Suisse should increase the pressure on central banks so that they put the “la” on the increases in key rates, which by definition penalize the economy.

“The fall in the share price of Credit Suisse “could have consequences for the policy decision of the ECB scheduled for tomorrow”, believe the economists of Capital Economics. “It is clear that the ECB has good reasons to wait and see how things are progressing. But our central assumption at this stage is that the Bank will continue with its pre-announced plan to raise the deposit rate from 2.5% to 3.0%, while emphasizing that policy is not on a pre-determined path.” they continue.

“With what is happening in Europe with the fall of Credit Suisse and what happened in the United States [la faillite de SVB, NDLR] it is hard to imagine that the central banks do not perceive the call of the foot of the market considering that the rate hikes are now sufficient”, dissects Alexandre Baradez, market analyst at IG France.

For the latter, the ECB could have two options on Thursday. First: raise its rates by 50 basis points (0.5%) as it had promised, but while specifying in its press release announcing this decision that the situation could change for the next meetings. Second: Opt for a lower rate hike of 25 basis points (0.25%). “But in any case, the ECB will show a much weaker aggressiveness than in previous meetings,” he believes;

Alexandre Baradez even believes that the Fed or the ECB could shake up the calendar by announcing decisions this Wednesday or simply give reassuring messages through the voices of their respective members.