Rising bond yields trigger inflation fear

Rising bond yields have economists on edge that global inflation may be about to stir, putting mortgage holders and deeply indebted governments into a bind.

The annual yield on 10-year US Treasury bonds has jumped 23 basis points to 1.15 per cent since the start of the month.

Although those rates are still very low by historical standards, that movement represents a sharp acceleration in the climb that has been occurring since the rate hit a low of 0.52 per cent in August.

The annual yield on New Zealand government 10-year bonds has climbed to 1.12 per cent from a low of 0.44 per cent in September.

ANZ chief economist Sharon Zollner said the ‘‘million-dollar question’’ was whether the rise in yields would prove a bit of a ‘‘blip’’ or the start of a more significant trend mirroring a rise in inflation. It was probably too soon for core inflation to rise sustainably, given that the ‘‘worst’’ of the economic impact from Covid still probably lay ahead.

‘‘In the New Zealand context, it is now that we are really going to feel the tourism hole. We have had crazy volatility and a bit of euphoria but it is still going to be a difficult year economically.’’

At the moment, the question on people’s minds was ‘‘how low mortgage rates would fall’’,

Zollner said. ‘‘But if interest swap rates keep rising, that story could turn around more quickly than people are assuming. People are assuming inflation is dead but if you print enough money and deliver enough stimulus in the face of inflationary expectations, there is no reason inflation would not come back to life.’’

If the recent rise in bond yields proved the start of a sustained change, it could spell trouble ahead – not just for some mortgagees but also for governments that had ‘‘ludicrous amounts of debt’’. Sharemarket investors would also be exposed. ‘‘At some point central banks are going to lose their ability to keep bond yields low,’’ Zollner said.

‘‘At that point their ability to backstop equities is gone and that would seem to be a possible end game for this euphoria we are seeing in global financialmarkets.’’

Some short-term rise in inflation was likely as and when vaccination programmes enabled major economies to get on top of the pandemic, which could create a danger point, she said. At that time, pent-up demand from consumers could be unleashed before businesses had an opportunity to ramp up supply.

‘‘That is the danger time for global financial markets – not the trough in demand but the surge in demand.’’ Interest rates were by their nature, forward-looking, Zollner said.

‘‘They will always turn before the economic data does.’’