<p>The volatility in global bond markets, is an outcome of investor concerns across a broad spectrum of issues. To begin with, President Donald Trump’s threat to deport 15 million illegal immigrants will impose a labour shortage in America, leading to price inflation. As employers lose workers, they will be strained to pay much more, in order to attract people from a shrinking pool of available human resources. Then there is the likely impact on prices when import tariffs are imposed by the US administration. Tariff impositions could lead to a disastrous trade war with China, which would almost certainly devalue the yuan as a first response.</p><p>Bond yields everywhere are moving against the grain of central bank expectations. 10-year US Treasury yields are now around 4.7%, despite the Federal Reserve’s interest rate cuts. Those on German bunds offer 2.6%, a near 30% jump from December yields. This pattern cannot be construed to be good news for governments that are struggling with rising debt, sticky inflation and falling productivity. Despite interest rate cuts in America and elsewhere, borrowing costs have barely stirred. Inflation is clearly viewed as the main reason. When retail prices and wages continue to jump, punters expect central bank rates to remain higher for longer. Wages in advanced economies are now rising at 4.5% and average inflation has risen to 2.9%, and more worryingly, in an upward trend.</p><p>Bond yields are frequently viewed as an indicator of things to come. The fact that they are higher than what one would expect, specifically, as central banks loosen monetary policy, investors are putting a term premium on their exposures. This is on the belief that the Fed, the European Central Bank and the Bank of Japan might be compelled to abruptly raise interest rates, if inflation scores turn upwards. The term premium for US dollar priced bond investments have risen from a negative of -0.3% a few months ago to 0.7%, at the time of writing this paper. That in financial markets constitutes a grim fall in confidence.</p><p>In the final count, worries remain about the sustainability of economic growth. The AI powered revolution is yet to really take shape in the form of higher productivity in industry, despite claims of what it will eventually achieve. And then there is a mismatch between fiscal and monetary policy objectives. With rising public debt across the world, fiscal deficits are now becoming entrenched where deviations from acceptable limits are hardly one-offs, but rather the norm. America’s fiscal deficit has been consistently over 7% of GDP – largely an outcome of the Biden administration’s handouts, as a part of its industrial policy, subsidising chip makers and renewable energy ventures in America. The European Union will issue fresh bonds this year of Euro 500 billion and America of about USD 2 trillion. With limited appetite amongst subscribers, bond yields should logically remain firm. </p><p>What does all of this actually mean for industry and the real economy? The answer is uncertainty, both in the realm of liquidity and pricing of money. The expectations that funds will become cheaper, following a shift in the interest rate cycle now appear to be misplaced. Inflation has not abated, productivity is rising much slower than wages and the political risk of trade and currency wars is now greater than before. The bond markets do not follow central banks. It is more the other way around. CFOs should keep one eye focused on liquidity.</p>
<p>The volatility in global bond markets, is an outcome of investor concerns across a broad spectrum of issues. To begin with, President Donald Trump’s threat to deport 15 million illegal immigrants will impose a labour shortage in America, leading to price inflation. As employers lose workers, they will be strained to pay much more, in order to attract people from a shrinking pool of available human resources. Then there is the likely impact on prices when import tariffs are imposed by the US administration. Tariff impositions could lead to a disastrous trade war with China, which would almost certainly devalue the yuan as a first response.</p><p>Bond yields everywhere are moving against the grain of central bank expectations. 10-year US Treasury yields are now around 4.7%, despite the Federal Reserve’s interest rate cuts. Those on German bunds offer 2.6%, a near 30% jump from December yields. This pattern cannot be construed to be good news for governments that are struggling with rising debt, sticky inflation and falling productivity. Despite interest rate cuts in America and elsewhere, borrowing costs have barely stirred. Inflation is clearly viewed as the main reason. When retail prices and wages continue to jump, punters expect central bank rates to remain higher for longer. Wages in advanced economies are now rising at 4.5% and average inflation has risen to 2.9%, and more worryingly, in an upward trend.</p><p>Bond yields are frequently viewed as an indicator of things to come. The fact that they are higher than what one would expect, specifically, as central banks loosen monetary policy, investors are putting a term premium on their exposures. This is on the belief that the Fed, the European Central Bank and the Bank of Japan might be compelled to abruptly raise interest rates, if inflation scores turn upwards. The term premium for US dollar priced bond investments have risen from a negative of -0.3% a few months ago to 0.7%, at the time of writing this paper. That in financial markets constitutes a grim fall in confidence.</p><p>In the final count, worries remain about the sustainability of economic growth. The AI powered revolution is yet to really take shape in the form of higher productivity in industry, despite claims of what it will eventually achieve. And then there is a mismatch between fiscal and monetary policy objectives. With rising public debt across the world, fiscal deficits are now becoming entrenched where deviations from acceptable limits are hardly one-offs, but rather the norm. America’s fiscal deficit has been consistently over 7% of GDP – largely an outcome of the Biden administration’s handouts, as a part of its industrial policy, subsidising chip makers and renewable energy ventures in America. The European Union will issue fresh bonds this year of Euro 500 billion and America of about USD 2 trillion. With limited appetite amongst subscribers, bond yields should logically remain firm. </p><p>What does all of this actually mean for industry and the real economy? The answer is uncertainty, both in the realm of liquidity and pricing of money. The expectations that funds will become cheaper, following a shift in the interest rate cycle now appear to be misplaced. Inflation has not abated, productivity is rising much slower than wages and the political risk of trade and currency wars is now greater than before. The bond markets do not follow central banks. It is more the other way around. CFOs should keep one eye focused on liquidity.</p>
