Big European investors bet against swings in ECB, BoE interest-rate expectations

By Yoruk Bahceli and Amanda Cooper

LONDON, March 11 (Reuters) - Big European investors are pushing back against sharp bond market swings that have upended expectations for central bank rate cuts, arguing they have gone too far even if soaring energy prices raise inflation risks.

Amundi, Europe's largest asset manager, has bought short-dated British and Italian government bonds and Allianz Global Investors added to a position favouring longer-dated UK bonds, senior fund managers told Reuters on Tuesday. A surge in energy prices since the U.S.-Israeli war against Iran has rekindled inflation fears. At one point on Monday, as oil surged towards $120 a barrel, traders briefly priced in a high chance of a Bank of England rate hike this year. Before the war they had bet on a cut this month.

Traders then went back to pricing a 50% chance of a cut by the year end as oil prices dropped on Tuesday, only to unwind most of those bets by Wednesday. Traders priced as many as two 2026 rate hikes from the European Central Bank on Monday, having priced a sizeable chance of a cut just last month. They were last pricing at least one hike this year and a near-50% chance of a second by December.

"It's too early for central banks to act. So, we tend to fade this short term. If the market is pricing hikes like it is, I think it's a good value proposition," said Gregoire Pesques, chief investment officer of global fixed income at Amundi, which manages 2.4 trillion euros ($2.79 trillion). Pesques echoed a view from many investors that the moves have been exacerbated by traders unwinding pre-war positions that were bullish on bonds.

The ECB will move swiftly and decisively if rising fuel costs feed into persistent euro zone inflation, ECB policymaker Joachim Nagel told Reuters on Wednesday. Inflation fears have hit UK and euro zone government bonds hard given Europe's reliance on energy imports. Interest-rate sensitive two-year yields have surged in Britain and Germany, as their prices have fallen .

That makes short-dated bonds attractive, said Pesques, who has added UK two-year paper. He is also buying two-year Italian bonds and selling 30-year debt.

Ranjiv Mann, a senior portfolio manager at Allianz Global Investors, said he added to a position favouring 30-year British government bonds relative to U.S. Treasuries last week as he believes the BoE may still cut rates in 2026. "Clearly, in the short term, markets are questioning some of that (Bank of England rates) pricing, but we think the underlying backdrop still remains supportive for gilts relative to other markets," Mann told Reuters on Tuesday, also citing a weakening labour market, easing inflation and tight fiscal policy. (Reporting by Yoruk Bahceli and Amanda Cooper; Editing by Dhara Ranasinghe, Karin Strohecker and Pooja Desai)