Societe Generale strategists have highlighted that the recent selloff in global fixed income markets, particularly in Western Europe, appears stretched following a sharp rise in yields. Over the past four weeks, 2-year and 10-year yields in Western Europe have increased by approximately 30 basis points, a move described as more pronounced than in other developed economies [1].
The strategists note that the market has already priced in a second European Central Bank (ECB) rate hike in September. However, they argue that expectations for a third rate increase to 2.75% by February may be excessive unless there is a significant acceleration in Eurozone growth and the emergence of second-round inflation effects [1]. If the ECB were to raise rates to 2.75%, policy would enter restrictive territory by about 50 basis points, which could enhance the attractiveness of the EUR/USD, provided the U.S. Federal Reserve does not tighten further and oil prices decline [1].
Despite these considerations, Societe Generale points out that the necessary economic conditions for further hikes—stronger growth and persistent inflation—have not yet materialized. As a result, they suggest that bonds and swaps are overdue for some relief after the recent spike in 2-year yields to 2.83% [1].
CONCLUSION
Societe Generale believes the market may have overreacted to recent fixed income developments, with current ECB rate hike expectations potentially too aggressive. Unless economic data shifts, a period of stabilization or reversal in yields could be forthcoming.