Despite higher inflation and upward pressure on treasury yields, the European Central Bank (ECB) maintains that this is not the time to raise interest rates.
In an April 14th press release, the ECB reaffirmed its commitment to both unchanged rates and its tapering of the Asset Purchasing Program. The Bank explained that APP-related purchases of government debt “will amount to €40 billion in April, €30 billion in May and €20 billion in June.” The APP is scheduled to end in the third quarter of this year.
The ECB explains that it wants to put off raising interest rates for as long as possible despite the APP phase out:
The Governing Council [of the Bank] also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB rates and, in any case, for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
The Bank’s decisions on future rate changes will depend on inflation, as it remains committed to a stable inflation rate of 2% “over the medium term.” No interest-rate increases will take place until euro-zone inflation stabilizes at this level.
Meanwhile, the market for euro-denominated treasury securities is gradually pushing rates upward. The par yield on a ten-year treasury has risen from 0.36% at the beginning of the year to 1.39% as of April 13th. The 20- and 30-year maturities have increased from, respectively, 0.88% and 1.09% to 1.72% and 1.84%.
American treasury securities have followed a similar but more pronounced trajectory. On January 3rd, the yields on the longest U.S. debt securities were as follows:
- 1.63% for the 10-year;
- 2.05% for the 20-year; and
- 2.01% for the 30-year.
As of April 14th, the yields were 2.83% on the 10-year, 3.09% on the 20-year, and 2.92% on the 30-year maturity. The higher yield on the 20-year than the 30-year is a first sign of a inverted yield curve, a phenomenon associated with rising uncertainty in financial markets.