It is common knowledge that bond markets can scare everyone. And if what’s happening to them doesn’t scare you yet, maybe you should pay more attention.
In less than three months, long-term interest rates have increased by nearly a percentage point in the United States, driving up borrowing costs for governments, businesses and households around the world.
And they show no signs of stopping just yet. The yield on the 10-year U.S. Treasury note, the global benchmark for long-term capital, rose another 0.11 percentage points on Tuesday to hit a new 16-year high after another round of surprisingly strong data in coming from the American labor market, which forced market players to once again push back their expectations of an American recession. In Europe, its German counterpart, the 10-year Bund, now displays a yield close to 3%, a level not seen since 2011.
As Deutsche Bank strategist Jim Reid pointed out, the weekend’s deal to avert a U.S. government shutdown has, if anything, made the short-term situation worse for bonds, “by removing a tangible risk for the economy” and making the task easier. The Federal Reserve will continue to raise interest rates. Markets now consider a further Fed hike more likely than not before the end of the year.
But that’s only half the story. Normally, rising long-term rates (expressed by government bond yields) go hand in hand with stronger economic growth and expectations of future inflation. This is not the case this time. The European and – despite labor market data – US economies are slowing overall, making it more difficult for China, the world’s second-largest economy, to generate its own economic momentum. Rising interest rates in a period of weak or faltering growth pose a double problem for governments, which must therefore pay more to cover their budget deficits.
what goes around comes around
It’s the long-awaited economic hangover from the pandemic. After spending money to solve the problems caused by COVID-19, the West must now curb the inflation it has caused. In the United States, the Eurozone and the United Kingdom, central banks are draining liquidity from the financial system, making money more scarce and driving up its price to levels not seen since 2007.
But at the same time, governments are still short of cash: the US Treasury alone plans to borrow $1.85 trillion on the markets during the second half of this year, to replenish its coffers after a difficult impasse on the debt ceiling and to finance a yawning budget deficit.
Two of the euro zone’s three largest economies, France and Italy, both presented budget plans for 2024 last week that far exceeded previous estimates, and on Tuesday the French Treasury released data showing that the public sector financing gap so far this year was up 25 percent. compared to the previous year, at 188 billion euros.
And although it is the US Federal Reserve that has set the tone for tightening global financial conditions, it is in Europe and emerging markets that the effects are being felt most, as the rising dollar once again raise the price of oil and other essential imports. to extreme heights.
“In trying to accommodate the Fed’s tightening and protect their currencies, some central banks – particularly in Europe – have been pushed to raise rates too aggressively,” said Dario Perkins, head of global macroeconomic research. at TS Lombard, in a recent note addressed to its clients. “The post-Covid American Party has become a European hangover, a new slice of America’s exorbitant privilege.”