One of the most annoying things about economic indicators is that they need context. A number does not make sense on its own. You also have to know where it is coming from, whose perspective you’re taking, and why.
So, when we tell you that the yields on 30-year government bonds have gone up this year, it could mean anything from all right, all right, all right, if it indicates low inflation and budding growth, to could you please stop that, if it is the result of high inflation and stagnating economic activity.
It is not often that we find Germany at the Matthew McConaughey end of the spectrum and yet here it is. Since the new German government announced that they are taking the foot off the country’s debt brake and spending more on infrastructure and defense, the mood, growth expectations, and long-term interest rates have risen considerably.
In the UK and Japan, the brakes are very much on since inflation has been rearing its ugly head again. With global economic anxiety running on high, the professional worriers (financial markets) now fear that central banks will have to raise interest rates on the short end to curb galloping price changes, and this spills into the long end.
Also, higher inflation means lower real return, so traders try to even that out by selling off the now-not-so-attractive government bonds.
In Japan, this collides with the government bond market undergoing more structural changes. Bank of Japan (BoJ) owns more than half of the Japanese government bond market and is one year into a multi-year attempt to normalize interest rates after a long-running negative rate regime. That means BoJ is not absorbing as many of the bonds as it used to, causing demand to be “meh” and bond prices to fall (which equals yields going up).
It is extra-concerning that Japan is issuing government bonds to ease and finance a gross national debt of more than 200% of its annual GDP.
And if we must address the clumsy elephant in the room, the US is not doing great with the long-term treasury rates either. As The Economist points out, the belief has been that the yield of the 30-year treasury bond could not get to or sit at the current 5% for long because everybody would snag them up immediately.
Now, we might see our beliefs suspended since self-inflicted isolation, looming inflation, a debt-to-GDP ratio of 123% and possibly rising, and Moody’s downgrade of the ability to pay that back, is making the 30-year treasury bond look less like a treat.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.