ECB cuts interest rates by another 25 basis points: here’s how mortgages and government bonds change
As widely expected, here comes the second interest rate cut by the ECB after the reduction of the 0.25% of June 12th. A quarter of a point less this time too, with the deposit rate set at 3.50%. A clear message to economic operators: the path of reducing interest rates continues without delay. The strategy is clear: it is better to move slowly and steadily in one direction, rather than proceeding too quickly and having to change direction along the way.
Inflation It seemed unstable but eventually dropped to a level close enough to 2%while economic growth remains positive. What are the main effects on families and financial markets now? The Euribor, the benchmark for variable rate mortgages anticipated the ECB’s decision and today the rate stands at at 3.47%providing some relief to those who have taken out variable rate loans who at the beginning of the year ended up paying 65 cents more than they do today.
In parallel The costs of newly issued variable rate mortgages are also falling but in this period this is an irrelevant fact since today fixed rate mortgages remain more convenient (140 cents less), guarantee financial security and solidity and encourage a transition towards a more sustainable economic system with green mortgages which allow you to benefit from highly competitive conditions. Fixed rates have dropped in turn and now the most convenient mortgages are between 2.4% and 3%values that are decidedly more accessible than twelve months ago.
What happens instead to those who have subscribed to government bonds? Also The consumer credit sector will benefit from the fall in interest ratesbut from current levels, rates will fall very slowly and at a much slower speed than that of mortgages which are more receptive, as far as the variable rate is concerned, to the decisions of the ECB. Generally, a fall in interest rates corresponds to a increase in the value of government bonds (BTP) or fixed-rate bonds. This occurs when, in order to adjust the yield of the BTP with fixed coupons and therefore higher than the new interest rate, the price will have to increase. Prices rise as a result of greater interest from savers in BTPs that have maintained a better coupon flow than that currently set by the market and consequently the demand for securities with a significant coupon means that the value of the securities in circulation tends to grow. BTPs are popular because they benefit from the prospect of an ECB ready to cut rates again by the end of 2024: this can be seen, on the secondary market, from the trend in BTP rates and the 10-year BTP-Bund spread. In recent months, with a view to diversification, many savers have purchased seven- or ten-year BTPs because it is able to offer significant returns considering the interest established in times of high rates. There are therefore two possibilities: sell the securities before their natural maturity realizing a reasonable capital gain (taxed) or keep them and collect the coupons every six months.
As interest rates continue to fall, investors are choosing investments with better investment potential. Investment grade corporate bonds, such as investment grade corporate bonds, offer some key advantages; they can play a significant role as income-generating instruments in investors’ portfolios; and historically, the higher coupons paid by corporate bonds relative to government bonds have helped offset the potential for negative performance; and they tend to exhibit significantly lower price volatility than stocks.
In times of high volatility like the ones we are experiencing many savers are looking for investment solutions with guaranteed capital such as the branch I life insurance policy that yields an interest rate in line with that of long-term government bonds. Known as revaluable policies, these investment products are popular because they do not subject the investor to fluctuations in the capital paid. Falling rates reinvigorate the stock markets. For companies, this means greater investments in development, growing profits and consequently attractive dividends for shareholders. The best performing sectors after the interest rate cuts are mainly cyclical ones such as utilities and pharmaceuticals.. Finally, for those with a short-term time horizon, it would be advisable to underweight liquidity products in favor of solutions with a slightly longer maturity (2/3 years).
#rate #cut #BTPs #attractive #heres #investors #moves #changing