Tightening even comes to ridiculous ECB sooner, faster as seven EU countries hit by 10% to 16% inflation, four by over 9%

The ECB created the biggest corporate bond bubble of all time. Now junk bonds are crushed, yields have already doubled, ready to double again and again, cleaning up the zombies.

By Wolf Richter for WOLF STREET.

The end of QE “is very likely to happen in the third quarter with a high probability of it being early in the quarter if the numbers continue to be as we’ve seen them,” Chairman Christine Lagarde told CNBC in an interview. today.

“But we have to be data dependent and we will be sequential,” she said.

This moves the end of QE to the start of the third quarter, so July, and possibly August. In the ECB’s policy statement last week, the ECB only said that QE “should be concluded in the third quarter”, and that moved the end of QE to September.

With ‘data dependent’ it means the ECB will watch in amazement with its mouth open as inflation now rages deeper and more insidiously through the economy, tearing apart the ECB’s philosophy that the NIRP and QE do not destroy the monetary system.

And with “data dependent” it also means that the tightening schedule will continue to accelerate – as they have done all year – because the inflation data keeps getting worse.

With “sequential”, it means that QE will end before rates are raised. So if QE ends early in Q3, rates could be raised from Q3 rather than Q4.

And now it’s not just once before the end of the year. “How many, how many, remains to be seen,” she said, leaving the number and scale of rate hikes to our imagination.

It’s now been the crescendo all year: every time someone at the ECB says something, it’s a little more hawkish – if that’s the right term – than before, and everything moves on. The tapering has already been accelerated. Now the end of the cone is further accelerated. And rate hikes are accelerating.

The ECB deposit rate is still negative (-0.5%), and some banks are charging their customers, even retail customers, for their deposits, turning interest rates into ECB punishment rates .

Now bets are lining up that the ECB will abandon NIRP this year and raise its key rate above 0% before the end of the year, which ECB Governing Council member Pierre Wunsch , suggested this week.

While raging inflation in the US is terrible, with CPI inflation at 8.5% in March, in many EU countries it is much worse.

In seven of the 29 EU countries, the “harmonised” inflation rate (calculated in the same way for all countries) is in double digits and peaks in Lithuania at 15.6%. In four other EU countries, including Spain, the inflation rate is above 9%. Germany’s 7.6% inflation rate sends shock waves across the country.

This inflationary shock is not joking:

EU countries by inflation rate, March
Lithuania 15.6%
Estonia 14.8%
Czechia 11.9%
Netherlands 11.7%
Latvia 11.5%
Bulgaria 10.5%
Poland 10.2%
Spain 9.8%
Romania 9.6%
Slovakia 9.6%
Belgium 9.3%
Hungary 8.6%
Greece 8.0%
Luxemburg 7.9%
Germany 7.6%
Croatia 7.3%
Ireland 6.9%
Italy 6.8%
Austria 6.7%
Sweden 6.3%
Cyprus 6.2%
Denmark 6.0%
Slovenia 6.0%
Finland 5.8%
Portugal 5.5%
France 5.1%
Malta 4.5%

The ECB’s NIRP policy, and its policy of buying not only government bonds and real estate bonds, but also large amounts of corporate bonds, has created the biggest bond bubble ever. companies of all time, with even the average euro junk bond yield falling to a ridiculously low 2.1% in November 2017. And still in September 2021, it was back to 2.25%, for a junk medium jump!

These companies have a considerable chance of defaulting on their bonds – which is why they are rated junk. And now the holders of these bonds not only face credit risk (default), but also an end to the ECB’s corporate bond buying orgy, and interest rates higher that will make it harder for these negative cash flow businesses to borrow to fund their negative cash flow and continue to operate.

And now, for these hapless bondholders, the icing on the cake of this toxic cocktail is rampant inflation pushing up the real yield on these junk bonds, based on the yields buyers locked in when they bought the obligations, deep into the negative.

Many of these junk bonds, bought in the years when ECB policies whipped them into a frenzy, will prove to be jaw-dropping instruments. Bad deals happen in good times.

The prices of these Euro junk bonds are falling as investors try to wipe them out before it gets any worse. And yields are exploding.

The average yield on junk bonds has more than doubled in six months, from 2.25% in September of last year to 4.65% today.

And this is only the beginning, because the ECB is still buying a few bonds and its deposit rate is still negative. These yields still have a long way to go, and investors who have been chasing yield in the NIRP zone where central banks have done all they can to kill yield, well, they will find once again that the pursuit yield is one of the most expensive hobbies. the.

These junk bond yields are expected to double again, and then they could double again, which will increase the cost of borrowing for companies rated as junk, and this will lead to a big zombie cleanup at the expense of investors.

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