Issue of the week: what are the bond markets telling us?
Investors globally have become antsy about bonds. Bad news for heavily indebted governments
It was always “plain as pike staff” that tax rises would eventually be needed to balance Britain’s books, said Jeremy Warner in The Daily Telegraph. “Yet what really seems to spook” the Chancellor, Rishi Sunak, is “the threat of rising inflation and interest rates”. Ever since the financial crisis, governments have been able to borrow at close to zero rates – useful when borrowing is at its highest peacetime level in history. But recent moves in bond markets have shattered the assumption that this beneficial status quo will continue. “Bond yields are on the up”, signalling that investors are worried about imminent inflation, said Merryn Somerset Webb in the FT. Last week, the ten-year US Treasury yield hit 1.6%. “That might not sound like much – and it is very low by historical standards – but it has tripled since the summer.” This is what we are used to. For the past 40 years, yields (which move inversely to bond prices) have mostly gone down. Hence, the consternation in markets. “Bonds are supposed to be boring. When they are not, you should pay attention.”
Equity investors certainly did, said Neil Wilson in Investors Chronicle. Stock markets across the world went into retreat as spooked traders saw bond yields “rising across the globe”. The tech-heavy Nasdaq index took “the brunt of US selling”; Asian markets “sold off by the most in 11 months”. Many indices bounced back earlier this week, said The Times. But there remains “heightened concern” that economies – shored up during the pandemic by massive government and central bank support – could be on the verge of “overheating”. Should inflation pick up too much, investors fear that central banks will abruptly raise interest rates and turn off the monetary spigots that have kept stock markets buoyant.
The drama reminded many of the 2013 “taper tantrum”, said DealBook in The New York Times. Then, markets reacted violently to remarks from Fed chairman Ben Bernanke that he would “taper off” the emergency bond-buying programme that had propped up markets since the 2008 financial crisis. Yet the current chairman, Jerome Powell, has said nothing of the sort. Indeed, it was “the central bank’s calm, despite a potential surge in post-pandemic economic growth”, that troubled traders most. It was, as analysts at TD Securities observed, “a tantrum without the taper”. Every parent knows “there are several stages that a child goes through before hitting a full-blown tantrum” – in this case, a “truly serious bond sell-off” that could cause great damage. We’re not there yet. But the warning that governments and markets should take from all this is that the era of “free money” is drawing to an end.