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Macroscope
Bond markets are nervous about central banks’ ability to contain inflation as South Korea, Indonesia and the Philippines face similar pressures
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Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.
Global bond markets are throwing a tantrum. On August 17, the yield on 30-year US Treasury bonds hit 5.3 per cent, its highest level since 2007 and up from 4.8 per cent as recently as June 29. The average yield on long-term debt across the Group of 7 advanced economies is the highest since 2008.
Several factors are at play. One of them is the surge in longer-dated debt issued by leading technology companies as they ramp up capital spending on artificial intelligence (AI),
especially data centres. Another factor is mounting concern about governments’ ballooning public debts, exacerbated by the extra spending to protect households and businesses from the impact of the energy shock from the US-Israel war against Iran.However, the political and economic constraints to tightening monetary policy are more consequential. In a report on August 17, Citadel Securities said the US Federal Reserve’s
reluctance to raise interest ratesdespite a prolonged period of above-target inflation and the enduring resilience of the US economy is the key factor driving up yields on long-dated debt.“The inability of policymakers to make progress on fixing the roof while the sun is shining is a key reason [long-term bond yields] remain so stubbornly high. So long as this persists, it will remain a risk for markets more broadly,” said Nohshad Shah at Citadel Securities.
In some Asian economies, there is much less sunshine. The publication of data on August 17 showing Japan’s economy grew by a much weaker-than-expected 1.1 per cent in annualised terms in the second quarter could not come at a worse time for
the country’s central bank, which is under intense pressure to raise interest rates more sharply to bolster its inflation-fighting credibility.Although
the surprise joint interventionin the currency markets by the United States and Japan on July 30 and 31 has so far done little to strengthen the yen, it has caused investors to price in a faster pace of interest rate increases. Bond markets are assigning an 80 per cent probability to a rise in Japanese borrowing costs next month, up from around 25 per cent before the intervention.Advertisement
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