Fixed income tantrums, when bond yields go out of control, usually end badly for stock markets in the short term. Pain and sudden falls. The T Note has set the direct rate at 5% and several analysts are already beginning to see this milestone as a new normal for debt.
The escalation is happening in a strange way. The bond is rising amid the Federal Reserve’s rate cut. The easing of monetary policy that began in September was expected to continue at the same pace as the slowdown in the economy and inflationwhich would cause the bonds to recover, but the scenario would change with the Trump effect. The measures he is considering to begin his mandate, starting with a cannon of tariffs for Europe and Asia, and ending with a large tax cut, on paper mean unleashing inflationary pressures around the world again.
Here is the first sign that the 5% is here to stay. In the UK, UK gilt yields soared higher amid an outcry over the nascent Labor government’s tax plans. At one point, the yield on British 30-year debt soared to its highest level since 1998.”There is a tantrum in the market and it is global“explains Gregory Peters of PGIM Fixed Income.
Brazil, France and Germany are suffering a spike in debt interest. Even Japanese bonds are at fifteen-year highs these days. “We will have some type of bond market fiscal event at some point over the next two years“, warns Peters of PGIM. The event sounds like a scare. Nobody knows the country, but some government will be forced to take unwanted measures.
Historically, the sudden rise in US ten-year bond yields It has brought bad news and has been the trigger for the 2008 crisis and the dotcom bubble.. Evocative episodes when the market smells of excess valuations.
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For Peters, the upward change in interest rates is part of a natural readjustment after years of an environment of rates close to zero following the emergency measures adopted after the financial crisis and then Covid. But others see new and worrying dynamics that present great challenges.
The so-called term premium on 10-year bonds, the additional interest investors demand to accept the risk of taking on longer-term debt, is now at its highest level in more than a decade and, according to a model of the Fed, has become an increasingly larger component of overall returns. It is another indicator to think that the 5% zone will be transitory.
“The increase in the term premium for us indicates growing concern about the US fiscal path“comments Zachary Griffiths, head of macro strategy at CreditSights. “The steepening of the curve is also more consistent with the historical relationship between large and rising deficits.”
As America’s debt and deficits pile up, investors are increasingly obsessed with fiscal and budget decisions and what they may mean for markets and the Federal Reserve, especially ahead of Trump’s return and a controlled Congress. by Republicans this month.
The The Congressional Budget Office estimated last year that the budget deficit is on track to exceed 6% of GDP in 2025.a notable gap at a time of solid growth and low unemployment. Now, Trump’s preference for tariffs, tax cuts and deregulation sets the stage for even larger deficits, as well as the potential for accelerating inflation.
The more debt, the more emissions
“It seems likely that this year there will be an increased focus on fiscal policy and other government measures, these include things like tariffs, possible tax cuts, possible spending cuts, measures that affect the workforce,” emphasizes Cameron Crise, macroeconomic strategist at Bloomberg Intelligent.
The more debt, the more emissions. On the current trajectory, the size of the bond market may nearly double to $50 trillion over the next decade, adding supply at a time of nervous demand.
Bond markets are famous for their tantrums, most notably in 2013, when the Fed said it would reduce bond purchases, and in late 2023, when 10-year yields touched 5%, only to hit a perceived low. a buying opportunity that starts a new rally in price.
For Jim Bianco, founder of Bianco Research, rising bond yields not necessarily dangerous. This is how the world used to be before the financial crisis. He notes that 10-year yields averaged around 5% in the decade to 2007.
The real outlier, he said, was the period after 2008, when rates were anchored at zero, inflation was persistently low and central banks were buying massive amounts of bonds in response to the crisis. That lulled the new generation of investors into accepting that 2% bond yield. “The normal thing was to have a real interest rate adjusted to zero inflation,” he emphasizes.
In a report this month, JPMorgan Chase & Co. strategists cited deglobalization, an aging population, political volatility and the need to spend money fighting climate change as reasons to expect the 10 grade years to return 4.5% or more in the future.
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