European Sovereigns – Market observations per 30 June 2023 –

ECB raises deposit facility interest rates to 3.5%, the highest rate in 22 years

• Euro area inflation amounted to 6.1% in May ’23 which mainly reflects higher profits and import prices, with profits accounting for 45 percent of price rises since the start of 2022. Import costs accounted for about 40 percent of inflation, while labor costs accounted for 25 percent. Taxes had a slightly deflationary impact.
• European Central Bank (ECB) announces multiple rate rises in recent months with 25 bp increases in May and June with the goal to retain control of inflation.
• A complication for the ECB is that its rate hikes come as a recession looms over the Eurozone. Tightening policy, while entering a recession, risks exacerbating any downturn.
• Another concern is that rate hikes are bound to further push up borrowing costs disproportionately in more indebted eurozone countries.

Government bond yields push higher as inflation persists

• Following the collapse of the Silicon Valley Bank (SVB), yields plunge in Mar ’23 to the lowest level thus far in 2023.
• Since the plunge in Mar ’23 yields gradually increased in Q2 2023, due to continuing inflation concerns and continued monetary policy tightening.

Volatility in the sovereign CDS spreads continues for several countries

• Credit default swap (CDS) spreads on debt from Germany, Spain and France have remained around the same level since Mar ’23.
• Italian CDS spreads fall significantly with a 20 bps improvement since Mar ‘23.
• Dutch CDS spreads also dropped but to a lesser extent with 5 bps over the same period.