Yield available, shocks remain

War’s second act – less shock, same drama

In Europe, April often brings spring flowers and the hope of calmer days, but this year it also brought a continued war that no one asked for. The Iran conflict—aka “Energy Shock, Part II”—rolled on through the month, albeit with fewer new surprises. EU officials spent early April collectively biting their nails over oil supplies, only to see a short-lived ceasefire in mid-month let everyone breathe. Oil prices, which had rocketed above $110 in March, momentarily dropped when Iran reopened the Strait of Hormuz. But markets have commitment issues: as soon as the ceasefire wobbled, oil soared back to record highs above $120, before tumbling again on yet another whiff of a peace deal and then soaring again to close the month. If you’re a European energy planner, you likely have whiplash from hitting refresh on the Brent crude price all day.

Natural gas markets also swung wildly—April’s chaotic supply news kept gas prices elevated, much to the chagrin of both households and the European Central Bank’s inflation forecasts. By late April, companies and consumers had resigned themselves to an expensive energy reality for the foreseeable future.

Shaky fundamentals meet stubborn inflation

If one is looking for robust growth in Europe, one might need a magnifying glass. The preliminary read on Q1 GDP indicated that the eurozone barely grew at all—think roughly 0.1% or so. The region is essentially treading water, weighed down by still-high inflation and now a wartime energy shock to boot. Domestic demand is soft: consumers are pinched by energy and food costs, while industry is facing higher input prices and some supply chain hiccups related to Middle Eastern shipping routes. Yet labor markets remain relatively tight, with lower unemployment providing a backbone of support. Inflation, however, remains above the ECB’s target—headline inflation in March was in the mid-threes (year-on-year), and while it’s down from last year’s peaks, it’s not falling as fast as policymakers would like. Worse, if oil lingers in triple digits and gas remains pricey, economists warn that eurozone inflation could break back above 5%. To sum up: Europe’s economy isn’t in crisis, but it’s not far from stagnation, and the war is an unwelcome aggravator of price pressures that had started to ease only months ago.

On hold, but fidgety

The ECB’s Governing Council met at the very end of the month and, as expected, kept interest rates unchanged—holding its deposit facility at 2.00%. President Lagarde managed a delicate balancing act: acknowledging the ugly inflation backdrop while emphasizing the need to understand the war’s impact before acting.

Insiders say the Council engaged in a robust debate, with a non-negligible number arguing for an immediate rate increase to reinforce their inflation-fighting credentials. In fact, the word “hike” was reportedly thrown around liberally in the meeting (perhaps more than on the actual hiking trails of Frankfurt). But in the end, caution won. The ECB essentially told markets, “We’re not raising now, but we’re keeping our options wide open.”

Lagarde hinted that if the war’s impact on energy and inflation proves sticky and growth holds up even modestly, rate hikes could resume as soon as June. Markets now price in almost three more 25 bp increases this year. It seems global central bankers are dancing to the hike tune; they all have to keep one eye on the same war-induced tripwires.

Core steady, BTPs swing wider

War uncertainty made for a jittery but ultimately constructive month in European rates. Two-year German bund yields, a bellwether for policy expectations, jumped to nearly 2.7% early in April amid war angst and speculation that the ECB might turn more aggressive. But once the central bank signaled restraint and the market glimpsed the risk to growth, short yields eased back. By end-April, the 2-year Bund was around 2.6%, a bit below where it began the month.

Meanwhile, short-term euro interbank rates (like Euribor and €STR) remained stable, anchored by the ECB’s steady policy stance. The war-driven scramble for safe assets lifted core sovereign bonds—German bunds and French OATs enjoyed decent demand on risk-off days—while peripheral yields (like Italian BTPs) fluctuated more with each shift in global sentiment.

In corporate credit, the mood cautiously improved; spreads that had blown out sharply during March’s panic started to grind tighter as April progressed. Still, no one is declaring “all clear” yet. The war’s outcome and energy markets remain wildcards, meaning European money markets are priced for continued vigilance.

Supply digested, nerves linger

European debt supply has been robust, but thanks to subdued conditions, markets digested it without drama in April. Government debt auctions in Germany and France met solid demand as investors sought quality assets. The war’s uncertainty may even have helped—when oil was ripping higher and equities shaky, a lot of cash sloshed back into safe-haven assets, effectively supporting bond markets.

Corporate issuance in Europe was more tentative. With war risk still present, many companies sat on the sidelines or issued only short-dated paper, preferring to see how things evolve rather than lock in potentially high borrowing costs over longer tenors.

In terms of liquidity, the European money markets continued to function smoothly. Banks and funds still hold substantial liquidity, so short-term funding rates were well-behaved. If anything, intra-Europe funding spreads narrowed slightly as panic subsided and participants realized the war hadn’t severely impaired day-to-day cash markets. The bottom line: liquidity remains ample, and there’s no sign of a credit crunch—just a collective tension about what could come next.

Political & geopolitical tidbits

If inflation and war weren’t enough, Europe had additional political side shows. In France, strikes and protests over pension reforms kept pressure on President Le Pen’s government (there’s nothing like angry Parisians to remind you that domestic politics haven’t paused, even if the world is on fire). Italy’s government flirted with drama of its own, but any potential market impact was overshadowed by the larger war narrative. The European Union tried to maintain a united front on the Middle East conflict—difficult given differing national energy dependencies and political leanings.

Still, EU leaders did manage to agree on a coordinated plan to bolster strategic oil reserves and diversify energy sources (some progress, even if a cynic might note these plans often gather dust post-crisis). And in a heartening moment of trans-Atlantic solidarity, US and European policymakers engaged to ensure that any escalation would be met with a unified financial front. These backchannel efforts aren’t exactly front-page news, but they indicate that grown-ups are at least in the room.

Defensive carry, pivot ready

European cash portfolio managers remain in an unenviable position: yields are high by recent standards, but so are uncertainties. In April, we took modest steps to seize opportunities created by March’s turmoil. As it became clear that the worst-case war scenarios might not materialize (knock on wood), we added selectively to longer-dated government and agency exposures to take advantage of the elevated yields and steepness in the money market curves (after all, why not earn an extra bit of carry if the ECB is on hold another month or two?).

However, caution is paramount. With the ECB explicitly leaving the door open for future hikes and inflation still running hot, we’re maintaining a robust liquidity buffer and limiting credit risk. European cash portfolios are positioned defensively but not fearfully: ready to pivot if war-related turmoil resurfaces or if the ECB turns more hawkish come June, yet positioned to benefit from any further normalization in front-end markets.

Conclusion

April proved that Europe’s front-end markets can adapt and persevere, even under war’s shadow. The war remains the wild card: it giveth (temporary yield rallies on ceasefire hopes) and taketh away (renewed inflation fears and rate hike bets when oil jumps).

But compared to March’s mayhem, April ended on a relatively stable note—no small feat given the circumstances. The mood in Europe’s money markets is one of sober resilience.

Yes, inflation’s too high and growth is too low, but the sky isn’t falling just yet. Central bankers in Frankfurt and London are on high alert, but for now they’ve chosen caution over knee-jerk reactions. Our main takeaway: Europe’s cash investors should continue to expect the unexpected, keep liquidity close at hand, and perhaps maintain a sense of humor. It might not lower inflation, but it sure helps when the news ticker is filled with one crisis after another.