One thing that is well-known is that bond markets can cause fear among people. If you are not already afraid of what is going on with them, it may be beneficial to start paying closer attention.
In just under 90 days, the U.S. has experienced a significant increase in long-term interest rates, causing an increase in borrowing expenses for governments, businesses, and individuals globally.
The 10-year U.S. Treasury yield, which is used as a measure for long-term capital, continued to rise on Tuesday, reaching a new 16-year high. This increase was driven by a strong set of data from the U.S. labor market, causing investors to postpone their predictions of a recession in America. Additionally, the 10-year German Bund yield, a similar benchmark for Europe, has also risen to almost 3 percent, a level not seen since 2011.
According to Jim Reid, a strategist at Deutsche Bank, the recent agreement to prevent a shutdown of the U.S. government has actually had a negative impact on bonds in the short term. This is because it eliminated a potential threat to the economy and has given the Federal Reserve more leeway to continue increasing interest rates. As a result, the market now predicts that there will likely be another increase in interest rates by the end of the year.
However, this is not the complete picture. Typically, when long-term rates increase (as seen through government bond yields), it is accompanied by a growing economy and anticipation of inflation in the future. This is not the situation currently. Despite positive labor market data, both the European and U.S. economies are experiencing overall slowdowns, making it challenging for China, the second largest global economy, to generate its own economic momentum. The rise in interest rates during a period of weak or declining growth creates a difficult situation for governments, as they must now pay more to cover budget deficits.
The concept of karma is that your actions will eventually come back to you.
This is the expected economic aftermath of the pandemic. After providing financial assistance to address the issues caused by COVID-19, Western countries are now trying to control the inflation that has resulted. Central banks in the U.S., eurozone, and U.K. are reducing the amount of money in circulation, leading to its scarcity and driving up its value to levels last seen in 2007.
However, governments are still struggling to obtain funds. The U.S. Treasury, for example, intends to borrow $1.85 trillion from the market in the second half of this year. This is to refill their reserves after a difficult debt ceiling dispute and to cover a significant budget deficit.
Last week, France and Italy, two of the biggest economies in the eurozone, presented their budget proposals for 2024, which exceeded previous estimates. On Tuesday, the French Trésor released data revealing a 25 percent increase in the public sector funding gap for this year compared to last year, totaling €188 billion.
The U.S. Federal Reserve has been leading the way in tightening global financial conditions, but the impact is being felt most strongly in Europe and emerging markets. The increasing value of the dollar is causing essential imports, such as oil, to reach record highs in price.
Some central banks, especially in Europe, have been forced to increase interest rates too quickly in an attempt to align with the tightening policies of the Federal Reserve and protect their currencies. According to Dario Perkins, head of global macro research at TS Lombard, this has resulted in a “whipsaw” effect. He also refers to the current situation as a “European hangover” and part of America’s “exorbitant privilege” following the COVID-19 pandemic.