[HSBC: Market Overestimates ECB Rate Hike Expectations, Favors German 2-Year Bonds] HSBC stated that due to the market's overly high expectations for European Central Bank (ECB) rate hikes, yields on short-term German government bonds are too high, making German 2-year bonds appear undervalued relative to their fair value. "In most cases, short-term instruments look significantly undervalued, currently reflecting expectations of two to three rate hikes," wrote Chris Attfield, HSBC's European rates strategist. He noted that even if the ECB raises rates once in September and then holds rates steady through the end of next year, the yield on German 2-year bonds would still be about 20 basis points higher than their fair value. The money market currently indicates that the ECB is expected to raise rates by 62 basis points by the end of next year, while HSBC's forecast is for no rate hikes and a single rate cut in the fourth quarter of 2027. Attfield wrote that the reason market yields are elevated is because "the market is not good at 'anticipating turning points,'" and investors are reluctant to factor in the end of the rate hike cycle and the possibility of rate cuts. HSBC has revised its year-end forecast for German 2-year bond yields from 2.85% to 2.5%, with a forecast of 2.2% for the end of 2027. (Cailian Press)