4 questions for Moritz Rieper, DWS

The restrictive monetary policy is taking its toll and economic momentum is likely to slow even further. The ECB has lowered its growth and inflation projections for 2024 and its inflation target of two percent could be reached as early as 2025. Nevertheless, we believe it is too early to celebrate any win over inflation. The uncertainties surrounding the underlying inflation trend are still too big. Although the labor market is beginning to weaken somewhat, wage growth has not yet slowed down markedly enough and the shortage of labor, particularly in the services sector, still suggests considerable inflation risks. We therefore assume that the ECB will wait for further data and only start cutting interest rates as of June this year. For the entire calendar year, we expect three interest rate cuts of 25 basis points each, resulting in a deposit rate of 3.25% by the end of the year.

Yes, we believe that the yield curve inversion will unwind over the course of this year. The front end should remain well supported by rate cut expectations, while longer-term yields appear too low in view of the upcoming supply and reduced demand from the ECB.  We also believe the likelihood of a recession, which the inverted yield curve suggests, is low.

In our view, Pfandbrief yields will be at levels similar to current ones by the end of this year. There may be greater differentiation between issuers. The yield curve for Pfandbriefe should also steepen, especially if issuing activity at the long end picks up again. For the first quarter, we believe that a further increase in risk premia is likely due to a plethora of new issues in the absence of ECB support. However, this increase should subside again over the course of the year.

We currently expect 2.5% for 2-year Bunds and 2.7% and 3.0% for 10-year and 30-year Bunds by the end of the year. Pfandbrief will continue to offer attractive pick-up over Bunds although we currently prefer shorter maturities due to the current curve structure.