The end of the rate cut cycle has already arrived. A handful of central banks still have the final blows ahead of them in their processes of lowering the price of money, while some, such as the Bank of Japan or Australia’s, are already entering a cycle of rate hikes. Investors are well aware of this, and are taking bond yields to maturity to new highs not seen for more than a decade. This is the case of the Japanese bond, which this week has reached profitability maximums not seen since 2007, or the global 10-year bond index that it constructs Bloombergnow at 2009 highs.
The weight of monetary policy on fixed income is enormous, setting the interest rates that serve as a reference for the rest of the market. Thus, the end of the cuts process is being like a tsunami for global bonds, and yields to maturity continue to grow.
The Japanese bond is the best example, having reached a new maximum in profitability in recent days that had not been touched since 2007, before the bankruptcy of Lehman Brothers, the trigger of the Great Financial Crisis. It was last Monday when The security with a maturity of 10 years reached 1.96% profitability, a level after which it has moderated slightly, to around 1.95% that it currently maintains.
And the Japanese bond, for which the markets are pricing in two rate hikes of 25 basis points next year, is not the only bond that is experiencing increases in profitability to reach new multi-year highs: the global sovereign bond index of Bloomberg with a maturity of 10 years has reached 3.9% this week, a new maximum not seen in 16 years, since 2009.
This increase responds to the end of the cycle of rate cuts that is spreading throughout the world: on the global map of interest rates, the end of cuts is spreadingand a period of stability seems to begin, which even, as has been seen in the case of Japan, has already led to the beginning of increases in the price of money.
At a time when economic growth is holding up surprisingly well (the revision of the macroeconomic forecast table this week at the Federal Reserve meeting demonstrates this), many central banks want to avoid any further increases in inflation, and hence the decision not to continue lowering interest rates after the latest cuts.
Lack of fiscal discipline weighs on bonds
Another factor that is putting upward pressure on 10-year bond yields is the high debt situation that some of the main economies on the planet maintain. This is the case of France, the United States and, above all, Japan, the latter with the highest debt/GDP ratio in the world, something that cannot be separated from the upward pressures that bonds are suffering in their yields to maturity.
In the market there are so-called ‘bond vigilantes’, a term to refer to the forces that put upward pressure on fixed income returns to maturity when the economic situation of an issuer deteriorates. The difficulties of some large issuers in managing to reduce their debt have also played a role. in the upward pressures that 10-year debt securities are experiencing.
Governments focus on short-term emissions
The increase in bond yields to maturity is being concentrated, above all, in longer-term securities and in the most important references for the market, such as debt maturing in 10 years. This is having an impact on the way in which governments finance themselves, as short-term debt issuance is increasing compared to the rest, to take advantage of the fact that they now offer a clear advantage in terms of financing costs.
This, in essence, is lengthening the root of the problem, since the financial situation of these economies does not improve by avoiding longer terms in emissions and the solution is to improve their financial situation and reduce debt. Although in the short term governments can save some on the interest they will have to pay to their lenders by resorting to shorter terms, this is a double-edged sword, since governments will be forced to go to the market more often for financing, with the risk that this entails.
