The trend of European and American rates may be facing differentiation! Castle Securities: Energy shocks and high interest rates may increase downward pressure on the European economy

The Zhitong Finance App learned that Citadel Securities (Citadel Securities) believes that although the impact on energy prices and the ECB's tightening of monetary policy continue to push European bond yields higher, these two forces may eventually become factors limiting the further rise in yield. The reason is that high energy costs and high interest rates will put more pressure on Europe's economic growth, and as investors become more concerned about the risk of economic slowdown or even stagnation, the room for European interest rates to continue to rise sharply may be limited.

Last week, when the global bond market was being sold off, the impact on European and British bonds was particularly obvious. The ECB raised interest rates again on the grounds of rising inflation risks, further boosting market expectations for subsequent austerity policies. Meanwhile, as Europe is highly dependent on imported energy, the rise in energy prices caused by the war in Iran has led investors to bet that the ECB may need to raise interest rates further to curb inflation.

However, Nohshad Shah, head of fixed income sales for Europe, Middle East and Africa at Citadel Securities, believes that the market may have underestimated the negative impact of energy shocks and monetary policy tightening on European economic growth, and this growth pressure may eventually limit interest rate increases.

Shah said, “As the consequences of austerity policies and energy shocks on economic growth become the focus of investors' attention, I increasingly doubt that forward interest rates in the middle of Europe's yield curve will continue to rise.”

The ability of the European and American economies to bear pressure divides US bond yields, or there may be more room for growth

Compared to Europe, Citadel Securities believes that the US economy is more able to withstand high energy prices and high interest rates, so there is still more room for growth in US interest rates.

Although rising energy costs and concerns about inflation are also driving up US Treasury yields, the US has a large oil and gas industry and is less sensitive to rising imported energy prices than Europe. At the same time, the continued boom in artificial intelligence investment is providing additional support to the US economy, making it able to withstand higher interest rates for a longer period of time.

Shah said that the US is “better able than Europe to absorb high interest rates,” while the risk of stagflation faced by Europe is even more prominent.

This difference in economic fundamentals may eventually be reflected in the trend of the Euro-American rate market. Shah believes that as growth pressure gradually becomes apparent, European medium-term forward interest rates may fall back compared to the US. In other words, even if European and American bonds have recently been affected by energy shocks and concerns about inflation, the yield trends between the two places may gradually diverge in the future.

For Europe, rising energy prices will not only drive up inflation, but will also increase costs for businesses and residents, weaken actual purchasing power, and drag down economic activity; at the same time, the ECB will further raise interest rates to control inflation, putting additional pressure on demand by raising financing costs. This means that the ECB faces an even more obvious policy dilemma: continued policy tightening will help curb inflation, but may further weaken economic growth.

As a result, the factors driving the recent rise in Eurobond yields may also be a force suppressing yields in the future. Once the focus of the market shifts from “inflation forces central banks to raise interest rates” to “high interest rates and energy shocks are dragging down the economy,” investors' expectations for further interest rate hikes in Europe may cool down.

The war in Iran is still the biggest variable, and the risk of US inflation cannot be ignored

However, Shah also warned that the US is not completely immune to energy shocks. As the war in Iran continues, the risk posed by an oil price shock remains high.

He believes that as the US midterm elections approach, Tehran may have stronger incentives to expand the conflict, including taking action on commercial shipping and energy infrastructure in the Middle East region. If the conflict escalates further, global oil and gas supplies face more serious disturbances, energy prices are likely to continue to rise, further increasing inflationary pressure in the US. Citadel Securities' judgment on the European and American bond markets is not that the risk of European inflation has subsided, but that it is more difficult for the European economy to withstand an environment where energy shocks and high interest rates coexist. The US, on the other hand, may have more room for policies and growth buffers with the local energy industry and economic support brought about by the AI investment boom.

This also means that after this round of global bond sell-off, the trend of European and American rates may gradually diverge: the further rise in European yields may be constrained by weak economic growth and the risk of stagflation, while if the US economy continues to show resilience and energy prices remain high, US bond yields may face longer-lasting upward pressure.