Trichet hints to watch out for higher rates

German bonds are falling sharply, particularly on the short end (2 yr yield is up 20 bps to 1.75%, the highest since June ’09 following hawkish comments about inflation from ECB Trichet in his press conference. He said inflation risks have moved to the upside and the central bank must use “strong vigilance” in monitoring it from here. Strong vigilance is historically code words for interest rates will move higher very soon. He also shifted their view on growth to being more balanced from down. Because his inflation concerns are mostly predicated on the rise in commodity prices, its certainly interesting seeing his comments in stark contrast to the viewpoint on the same set of facts that Bernanke has given over the past two days. With this said, Trichet did make a point to say that we won’t see a series of hikes but at least some may be coming soon. The Euro is rising to just shy of $1.40 vs the US$, the highest since Nov.

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