Euro-Area Bond Spreads Surge as Rate Hike Expectations Drop
European Central Bank interest rate hike expectations fell after sovereign bond spreads surged across the euro area's more indebted periphery members.
Sovereign bond spreads across the euro area surged on Friday, prompting market traders to lower their expectations for future interest-rate hikes by the European Central Bank. The volatility reflects growing concerns over rising borrowing costs for the region's more indebted periphery members.
Market participants are now betting that the central bank will be forced to limit the scope of its rate increases to prevent economic instability in these vulnerable member states. As a result, money markets have adjusted their forecasts, pricing in between two and three rate hikes by the end of next year. This represents a decrease from the four hikes that were fully priced earlier in the week.
