European Interest Rate Cycle Fears Spark Bond Rout

The Paris-based major commercial banks, including Credit Commercial de France, Banque Nationale de Paris, Credit Lyonnais SA, and Societe Generale, surprised markets by raising their base lending rate to 7.95 per cent, effective September 1. This decision was made in response to an increase in their financing costs on the money market, reversing a quarter-point reduction made on May 19. The move sparked fears that the interest rate cycle in Europe has bottomed out, leading to a plunge in European bond futures prices. The French 10-year government bond futures dipped half a point to 113.26 from 113.88, while the German counterpart fell nearly half a point to as low as 91.60 on the London International Financial Futures Exchange.

Key Takeaways:

• Major commercial banks in Paris, including Credit Commercial de France, Banque Nationale de Paris, Credit Lyonnais SA, and Societe Generale, raised their base lending rate to 7.95 per cent, effective September 1, in response to increased financing costs on the money market.
• This move reverses a quarter-point reduction made on May 19, which was part of a series of cuts that began in 1993.
• The decision sparked fears that the interest rate cycle in Europe has bottomed out, leading to a plunge in European bond futures prices.
• The French 10-year government bond futures declined by half a point to 113.26 from 113.88, while the German counterpart fell nearly half a point to as low as 91.60 on the London International Financial Futures Exchange.
• Bank of France's money market operations will be closely watched to gauge the potential for further interest rate cuts.
• Andrew Milligan, chief economist at New Japan Securities, stated that this move will lead to the perception that even if the Bundesbank ease again, the interest rate cycle in Europe has bottomed.

Statistics:

• French 10-year government bond futures fell by half a point to 113.26 from 113.88.
• German bond futures fell nearly half a point to as low as 91.60 on the London International Financial Futures Exchange.
• The base lending rate was raised to 7.95 per cent, effective September 1.
• The move reverses a quarter-point reduction made on May 19.
• The original rate was 7.70 per cent, established in 1993.

Sources:

• Bloomberg Business News