Tightening Comes Even to Ridiculous ECB Sooner, Faster as Seven EU Countries Hit by 10%-16% Inflation, Four by over 9%

The ECB created the best company bond bubble ever. Now junk bonds get crushed, yields already doubled, set to double once more, and once more, cleaning out the zombies.

By Wolf Richter for WOLF STREET.

The tip of QE “could be very more likely to occur in the midst of the third quarter with a excessive chance that it is going to be early within the quarter if numbers proceed to be the way in which we have now seen them,” President Christine Lagarde informed CNBC in an interview at the moment.

“However we have now to be information dependent and we will probably be sequential,” she stated.

This strikes the tip of QE to the early a part of the third quarter, so July, and perhaps August. Within the ECB coverage assertion final week, the ECB solely stated that QE “ought to be concluded within the third quarter,” and that had moved the tip of QE to September.

With “information dependent” she means the ECB will watch with surprised open mouth how inflation is now raging additional and deeper and extra insidiously into the economic system, tearing up the ECB’s philosophy that NIRP and QE don’t destroy the financial system.

And with “information dependent” she additionally signifies that the tightening schedule will hold getting sped up – as they’ve been doing all of it yr – as a result of the inflation information retains getting worse.

With “sequential” she signifies that QE will finish first earlier than charges are being hiked. So if QE ends early in Q3, charges may very well be raised beginning in Q3, moderately than This autumn.

And now it’s not simply as soon as earlier than year-end. “How a lot, what number of occasions, stays to be seen,” she stated, leaving the quantity and measurement of the speed hikes as much as our creativeness.

This has now been the crescendo all yr: Each time somebody on the ECB says one thing, it’s a bit extra hawkish – if that’s the fitting time period – than earlier than, and every little thing is getting moved ahead. The taper has already been sped up. Now the tip of the taper is being additional sped up. And the speed hikes are being sped up.

The ECB’s deposit charge remains to be adverse (-0.5%), and a few banks are charging their prospects, even retail prospects, for his or her deposits, thereby turning rates of interest into ECB-inflicted punishment charges.

Now the bets are lining up that the ECB will abandon NIRP this yr, and lift its coverage charge above 0% earlier than the tip of the yr, one thing that ECB Governing Council member Pierre Wunsch steered this week.

Raging inflation in Europe.

Whereas the raging inflation within the US is horrible, with CPI inflation at 8.5% in March, in quite a few EU international locations, it’s a lot worse.

In seven of the 29 EU international locations, the “harmonized” (calculated the identical method for all international locations) inflation charge is within the double digits topping out in Lithuania at 15.6%. In 4 extra EU international locations, together with Spain, the inflation charge is above 9%. Germany’s inflation charge of seven.6% is sending shockwaves by way of the nation.

In most of the non-euro international locations in Europe, central banks have for almost a yr jacked up rates of interest to decelerate the surge of inflation, together with some shock-and-awe shock charge hikes by the Czech Nationwide Financial institution, the Nationwide Financial institution of Poland, and the Central Financial institution of Iceland (right here’s my February replace on this). The ECB gasoline been the laggard.

However this inflation shock is just not kidding round:

Biggest company bond bubble of all occasions pops.

The ECB’s NIRP coverage, and its coverage of shopping for not solely authorities bonds and housing bonds, however giant quantities of company bonds — echoed by different central banks in Europe that had related applications — has created the best company bond bubble of all occasions, with even the typical euro junk bond yield falling to a ridiculously low 2.1% in November 2017. And nonetheless in September 2021, it was again at 2.25%, for a mean junk bond!

These corporations have a substantial likelihood of defaulting on their bonds – that’s why they’re junk rated. And now the holders of those bonds should not solely confronted with credit score threat (default), but in addition the tip of the ECB’s company bond shopping for orgy, and better rates of interest that can make it tougher for these cash-flow adverse corporations to borrow to fund their adverse money flows and hold working.

And now, for these hapless bondholders, the cherry on this poisonous cocktail is raging inflation that’s pushing the actual yield of those junk bonds, based mostly on the yields that patrons locked in after they purchased the bonds, deeply into the adverse.

Many of those junk bonds, bought within the years when the ECB’s insurance policies whipped them into frenzy, will turn into breath-takingly painful devices. Unhealthy offers are made in good occasions.

Costs of those euro junk bonds at the moment are tumbling as traders try to shed them earlier than if will get even worse. And yields are surging.

The common junk-bond yield has greater than doubled in six months, from 2.25% in September final yr to 4.65% now.

And that’s just the start, as a result of the ECB remains to be shopping for a smattering of bonds, and its deposit charge remains to be adverse. These yields have a protracted strategy to go, and traders that had been chasing yield in NIRP zone the place the central banks did every little thing they may to kill yield, nicely, they are going to discover out as soon as once more that chasing yield is without doubt one of the most costly hobbies on the market.

These junk bond yields are set to double once more, and so they might then double once more, which can jack up the price of borrowing for junk-rated corporations, and that can trigger lots of cleaning out of the zombies at investor expense.

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