The Bundesbank Fears the Rate Hike After The Pandemic

The German central bank had already increased provisions from 2.4 to 18.8 billion euro.

BERLIN. For the first time since 1979, the Bundesbank will not pay a dividend to the German government. The reason for this decision is the increase in yields on government bonds. In practice, Buba prefers to set aside money in case interest rates rise again and cause losses in the huge pile of bonds it has bought as part of the European Central Bank’s stimulus programs. This was announced by the Bundesbank itself, while its number one, Jens Weidmann made it known that we must “analyze very carefully the rise in bond rates”. Yields on 10-year US Treasuries flew to 1.61% last Thursday, before dropping to around 1.4% in the following days. Today they have risen to 1.45%. Bund rates have also risen, which has unsettled investors, causing severe volatility in the equity markets.

In particular, technology stocks have suffered from the so-called “steepening” of the bond rate curve, which has shrunk in recent days thanks to the promise of continuous purchases by the ECB and the Fed. To mitigate the risk of a rate hike, which pushes bond prices down and corporate bonds towards insolvency, the German central bank had increased provisions from € 2.4 billion to € 18.8 billion. “This increased level of risk coverage is the main reason why the Bundesbank is posting a balanced annual result for 2020 and is not distributing a profit for the first time since 1979,” Bundesbank President Jens Weidmann said. The Bundesbank predicted that German inflation would rise above 3% by the end of the year, but only temporarily, and announced its intention to increase its previous forecast for 2021: «Our economists now expect a average annual inflation rate in 2021 which is slightly above their December forecast of 1.8%, ”noted Weidmann.