Key Eurozone Swap Rate Could Breach Major Level on Warming Inflation
- Written by: Sam Coventry
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Eurozone interest rates are moving higher on Tuesday following an unexpectedly strong inflation print.
There's a real prospect that a key European interest rate benchmark breaks a psychologically important area in the coming months.
This is the assessment of ING Bank, who say the move will be driven by a series of above-consensus inflation prints.
"If eurozone inflation does not undershoot the ECB’s target in the coming months, as markets are positioned for, then seeing the 10Y swap rate break through 3% is suddenly not an unrealistic scenario. But for this to happen, we first need a series of hotter-than-expected inflation numbers," says Michiel Tukker, Senior European Rates Strategist at ING.
And such a hotter-than-expected inflation print duly arrived on Tuesday: HICP inflation for November came in slightly higher than expected at 2.2%, up from 2.1% in October.
This is ahead of consensus expectations for an unchanged reading. Core inflation held steady as expected at 2.4%.
Following the data, the EUR 10 Years Interest Rate Swap rate rose to 2.75%, its highest in
The euro rose against major peers, driven by the faster rise in Eurozone interest rates relative to the UK and U.S.
The 10-year EUR swap rate is effectively the price at which the market is willing to exchange fixed interest payments for floating payments over a decade.
Because the floating leg is tied to short-term euro money-market rates (e.g., €STR), the fixed rate tells you where investors think average short-term rates will sit over the next ten years.
If the 10-year swap rises, markets think the ECB will keep rates higher for longer.
Many important sectors price loans off the 10-year swap rate, including:
- Mortgage lenders
- Corporate issuers of fixed-rate debt
- Infrastructure and project finance
- Utilities and regulated industries
These institutions hedge interest-rate risk directly using swaps, so their cost of funding is mechanically linked to swap levels.
