European inflation expectations are rising as investors anticipate ongoing easy monetary policy and a global economic rebound boosted by U.S. fiscal spending.
The closely watched 5-year 5-year forward inflation swap rate for the euro area rose above 1.35% Tuesday, the highest in over a year. It continued to hover near that level Wednesday. The metric shows an average expectation for price increases over five years.
“This is quite a remarkable move, it has surprised us,” said Jorge Garayo, a rates and inflation strategist at Société Générale .
Forecasts for higher prices are playing out in the bond market. Germany’s 10-year break-even rate, or the difference in yield between its benchmark bond and a price level-linked bond, climbed above 1% for the first time since February. Italy’s equivalent rate hit a more-than two-year high. Essentially, a higher break-even rate suggests investors expect prices to rise faster.
“With the onset of vaccines, people are upgrading their growth outlooks,” said UBS rates strategist Rohan Khanna.