By Ven Ram, Bloomberg Markets Live reporter and strategist

Front-end German bonds&nbsp;have so far resisted&nbsp;the upside risk to the European Central Bank’s rate trajectory. That may not last.

The two-year yield has been bobbing in a 2.50%-3% range for a few months, even though interest-rate traders are factoring in a higher terminal rate than they were at the start of the year. These points are what traders are watching for:

“The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.”

All told, the markets are ill-prepared for the ECB raising rates much higher than 3.75%, and it’s possible that today’s policy review may provide a reality check on that pricing.

Any tweak in the language that suggests inflation is stickier will spur traders to price in a terminal rate that takes it toward 4%.
{ai:summary}German bonds may be at risk as the front-end of the market resists the upside to the European Central Bank’s rate trajectory. The two-year yield has been holding in a 2.50%-3% range, but traders are factoring in a higher terminal rate than they were at the beginning of the year. As traders prepare for a statement from the ECB, the possibility of a more hawkish note could be bad news for bonds. A tweak suggesting inflation is stickier could be priced into a terminal rate, taking it towards 4%. #economyThere is a heightened risk that the ECB may sound more hawkish than before and may suggest it has reached the last lap of tightening. If the statement suggests this then bonds will rally, if not then any tweak in the language that suggests inflation is stickier will spur traders to increase prices. Despite inflation averaging at 7.4%, the market is unprepared for the ECB to raise rates much higher than 3.75%. Today's policy review may therefore provide a reality check on that pricing. #finance

ECB Set To Test Market Positioning On Rate Trajectory

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