2023-10-04 19:32:21
Will the bond bomb explode or accelerate the global recession?
Global government bonds are a very important and significant economic and investment tool. It is a reliable asset with a guaranteed return on investment, but high returns above the average level withdraw liquidity from the markets and harm high-risk assets, especially stocks and commodities. It also adds burdens on the public finances of the bond-issuing country, which is obligated to pay high returns to investors.
Government bonds are one of the government debt instruments with quick inputs to the issuing country, and are divided according to their terms into several categories, the most prominent of which are for one, two, 5, 10, 20, or 30 years. US government bonds are the standard bonds internationally, and most other bonds are evaluated on their basis. Two-year and 10-year bonds are also an important measure of what is known as the yield curve, which in most normal circumstances is steeper the longer the duration of the bond, but this curve may witness an inversion in the event of severe turmoil or economic uncertainty.
As a result of the successive and sharp increase in interest rates around the world, especially by the Federal Reserve (the US central bank), US bond yields jumped to extreme levels not reached since the global financial crisis in 2007, followed of course by their counterparts in Europe and Japan, in an attempt to maintain their competitiveness.
Bond yields increase if countries intensify their efforts to obtain financing, or in the case of intense selling by traders, in an attempt by bond issuers to support them.
In recent days, continued selling in global government bond markets led to a rise in 30-year US Treasury bond yields to 5 percent for the first time since 2007, and a rise in 10-year German borrowing costs to 3 percent on Wednesday, moves that may accelerate… From the global economic slowdown.
The confusion deepens with the growing feeling that interest rates in major economies will remain high for a longer period in a strenuous attempt to contain inflation, which is always fueled by strong US economic data that encourages the Federal Reserve to move forward on its hawkish path… and as yields continue to rise, Speculation is increasing among traders and investors in an attempt to obtain a guaranteed investment return, amid more fragile conditions in other areas of investment.
The Bank of Japan conducted an emergency bond purchase on Wednesday, offering to buy more bonds compared to the previous unscheduled operation, but it failed to prevent Japanese government bond yields from rising to new levels, the highest in a decade.
The benchmark yield on 10-year Japanese government bonds rose to 1.805 percent for the first time since August 2013, after the Bank of Japan offered to buy additional bonds worth 675 billion yen ($4.52 billion) with maturities ranging between 5 and 10 years.
“The Bank of Japan offered to buy much more 10-year bonds than the market expected, but the impact was very limited,” said Kazuhiko Sano, a strategist at Tokai Tokyo Securities.
The yield on 20-year bonds jumped by 6 basis points to 1.58 percent, a level not seen in the markets since December 2013, while the yield on 5-year bonds rose to 0.34 percent, which is its highest level in a decade. .
In the US Treasury bond market – which is the cornerstone of the global financial system – 10-year bond yields rose by about 30 basis points to 4.8 percent this week alone, and rose by about 100 basis points this year, after jumping more than 200 basis points in a year. 2022.
On Wednesday, 30-year US bond yields touched the important psychological level of 5 percent for the first time since the global financial crisis. The yield on 10-year German bonds also reached 3 percent, a significant event in a market where yields were negative until early 2022.
As this turmoil spreads, Australian and Canadian 10-year bond yields have risen by more than 50 basis points each so far this week, and 30-year British government bond yields reached a 25-year high above 5 per cent (Wednesday).
Jan von Gerrich, chief market strategist at Nordea, said: “If the rapid rise continues, this will affect risk appetite more clearly, and we will see greater declines in stock markets, and a greater rise in spreads, and this would stop the movement in Markets,” according to Archyde.com.
Government borrowing costs affect everything from mortgage rates for homeowners to interest rates on loans for businesses, as the speed of rising bond yields raised alarm across stock markets, while pushing the safe-haven dollar higher – which in turn caused other currencies to suffer. Such as the Japanese yen.
Bond strategists still expect yields to decline and their prices to rise, with the weakness of the global economy… but they added that the current momentum is weighing on the markets, and has currently led to extreme selling waves in order to obtain gains.
Juan Valenzuela, fixed income portfolio manager at Artemis Asset Management, said: “At the moment there is great momentum behind the selling; “Because the market positioning was wrong… A lot of people bought into the idea that because the Fed was reaching the peak of interest rate hikes, it was time to buy government bonds, which meant that the majority of the market was running behind long-term bonds.”
The recent sell-off puts global bond markets on track for a third straight year of losses. In a sign that bond volatility is rising again, the closely watched MOVE index reached its highest level in four months.
“If we don’t pay attention, we could very quickly reach 5 percent,” said Padraic Garvey, regional head of research for the Americas at ING, referring to 10-year Treasury yields.
Analysts said the rise in inflation-adjusted real yields was a particularly difficult burden for corporate borrowers… The new rise in borrowing costs also represents a headache for central banks, as they weigh the need to keep interest rates high to contain inflation against the deteriorating economic outlook.
“In the long term, this move in itself has the potential to sow the seeds of its downfall,” said Richard McGuire, head of interest rate strategy at Rabobank, who forecasts a recession. “Ironically, selling bonds only strengthens our confidence that it will to an inevitable tightening of financial conditions; “This will affect demand in the future.”
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