Introduction
The meeting of the European Central Bank (ECB) on June 5, 2025, resulted in a reduction of the key interest rates by 25 basis points. The deposit rate now stands at 2.00%, the main refinancing rate at 2.15%, and the marginal lending facility at around 2.40%. This measure aims to promote disinflation and stabilize inflation at a target value of 2% in the medium term.
Relationship Between Key Interest Rates and Bond Yields
Normally, a reduction in key interest rates leads to a decrease in yields on government and corporate bonds. However, we are currently experiencing rising bond yields, which seems atypical at first glance.
Possible Explanations for Rising Bond Yields
- Inflation Expectations: Higher risk premiums may be demanded by investors if higher inflation is feared in the long term.
- Economic Risks: Interest rates may rise due to trade tensions as demand for bonds decreases.
- Market Dynamics: Unordered market developments could temporarily counteract the monetary policy intention.
- Liquidity Preference: During uncertain times, liquidity is preferred by investors, which depresses bond prices.
Impacts on Savers and Investors
- Savers: Low interest rates often mean lower returns on savings accounts.
- Investors in Fixed Income Securities: Rising market interest rates lead to falling prices of existing bonds.
- New Investments in Bonds: Higher yields offer better conditions.
Conclusion
The ECB’s reduction of the key interest rate does not always lead to falling capital market interest rates. Inflation expectations, economic risks, and global factors play a crucial role in the bond markets. Diversification, adjustments in risk appetite, and market observations are essential for investors.