Global Bond Yields Surge
(Please see updates for this blog: update 07Jul2022)
Global Bond Yields
Global bond yield have been on an upward trajectory in the past one year, against the backdrop of inflationary pressures exaggerated by supply chain bottlenecks following the outbreak of COVID-19 Pandemic.
For example, the US 10-year Treasury yield rose, year-to-date, by 23 basis points to 1.74 per cent (as on 04Mar2022); while those of the UK and Brazil surged by 26 and 144 basis points respectively (100 basis points equals one percentage point) in the same period (details in Table 1 below).
As discussed in my earlier blog, global central banks have not been raising interest rates, for fear of nipping the nascent economic recovery in the bud, even though inflation rates have surged globally lately. Consumer prices have gone up substantially both in the developed and emerging economies.
Table 1: Global Bond Yields >
As at the start of 2022, there used to be three major countries with negative bond yields (10-year sovereign bond yield is generally considered as benchmark bond yield)--namely, Germany, the Netherlands and Switzerland. Now there is only one nation, that is, Switzerland, with negative bond yield among the major nations.
Russia's government bond yield spiked by 1147 basis points to 19.89 per cent in the past two months, following the Western economic sanctions after Russia invaded Ukraine. To shore up its currency, rouble, Russia raised its benchmark interest rate from 9.5 to 20 per cent.
Russian rouble depreciated by 27.4 per cent against the US dollar since the beginning of this year. Conversely, the US dollar gained 37.7 per cent against the rouble. Despite raising interest rates by more than 10 per cent, rouble continues its slide against the dollar. It now quotes at 106.50 against the dollar from about 80 before the start of Russian invasion of Ukraine.
Global financial markets have been in turmoil following the invasion. Even before the invasion, surging inflationary expectations have roiled teh financial markets. The invasion exacerbated the market upheaval.
Commodity prices, including, crude oil, metals and agricultural commodities, have increased substantially in the past 10 days. This is going to benefit commodity exporting nations, like, Australia, Brazil and other South American nations, Saudi Arabia, Russia and others.
Major commodity importing nations, like, India and China, are at the receiving end of the commodity boom. Global supply chains have been disrupted heavily since 2o21, following the COVID-19 Pandemic lockdown and workers opting out of employment due to homecare needs, health issues and fear of the virus.
Global Interest Rates
Table 2 shows the changes in benchmark interest rates of major countries across the globe. Major central banks have been avoiding raising of interest rates even though inflation rates have been rising for more than a year.
But there are a few countries which have raised interest rates to control inflationary expectations. For instance, Brazil raised its benchmark rate by 150 basis points year-to-date. Bank of England raised its bank rate by 25 basis points; while China decreased its interest rate by 10 basis points.
Table 2: Global interest rates >
Globally there are only three nations, namely, Japan, Denmark and Switzerland that maintain negative interest rates officially. There is no change in the benchmark interest rates for more than a year in these nations.
Russia's central bank raised its interest rates from 9.50 to 20 per cent last month, to stem to depreciating rouble, while the rouble exchange rate remains oblivious to the hike in interest rate. In Economics 101, higher interest rates lead to stronger domestic currencies.
The US, India, the European Central Bank (ECB), Turkey and Australia have not raised their interest rates even though consumer prices have shot up in these countries.
(Blog continues below)
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Global Inflation Rates
Table 3 delineates inflation rates (consumer price inflation or CPI), 10-year bond yields and interest rates of major countries. The US inflation rate in January 2022 is 7.50 per cent, which is the highest since February 1982. The UK inflation rate is 5.50 per cent, the highest since Mar1992.
Table 3: Global bond yields, interest rates and inflation >
Conclusion
The article explored how global interest rates and bond yields have changed in the past two months with surging inflation globally. With rising commodity prices and heightened global uncertainty after Russia invaded Ukraine, volatility in financial markets has increased.
The CBOE VIX (volatility index) rose from 17 at the start of 2022 to 32 now, implying higher risks for the US stock prices.
The Federal Reserve, America's central bank, at the forthcoming March 16th meeting, is expected to raise the federal funds rate (or fed rate simply) by at least 25 basis points. Before Ukraine invasion, the Fed was expected to raise the fed rate by at least 50 basis points. But after the turmoil in financial markets, Western sanctions on Russia led by the US and Euro area nations and surging commodity prices, the global economic outlook seems to have changed. For the worse.
So, it is expected that the US Fed will take into account the downward projections in the US economic growth, heightened financial markets volatility and record-breaking rise in inflation rates.
Overall, my expectation is that the Fed may raise the fed rate by 25 basis points at the forthcoming March 15-16th meeting, provided other things remain the same in the interim. Let us revisit how things pan out in the next 10 or 12 days.
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P.S. 1: Global bond yields were volatile in the past two weeks, with yields rising till February 24th, 2022 when Russia invaded Ukraine. For example, the US 10-year Treasury yield topped at 2.05 per cent in mid-February 2022 and was around 2.00 per cent on February 24th; but quickly slid to 1.74 per cent now. Due to higher global uncertainty, investors flocked to safe-haven assets, like, the US Treasury bonds, pushing up bond prices and lowering yields (bond yields move inversely to prices).
This yo-yoing is also reflected in the fall of negative yielding debt and its rise post-Ukraine invasion. As per a graph shared on Twitter, the total negative yielding debt (as reflected in Bloomberg Barclays Global Aggregate Negative Yielding Debt Index) in the world plunged to USD 4 trillion in February 2022, but rose quickly to USD 7.20 trillion after Ukraine was invaded by Russia. (At the end of Dec2020, the total negative yield debt touched a peak of about USD 19 trillion --see graph below)
Total negative yielding debt used to be at USD 2 trillion in 2015.
P.S. 2: There used to be five countries (Denmark, Finland, Germany, the Netherlands and Switzerland) with negative 10-year bond yields at the end of November 2021 (see Table 1 of my earlier blog). As of now, there is only country (Germany) with negative 10-year yield.
References:
Tweet thread dated 22May2021 on global bond yields and interest rates
Tweet thread dated 03Apr2021
Why do investors pay interest rate to lend money to governments? (negative yield debt)
Tweet 20Jun2019 - negative yielding debt
TE global bond yields
TE global interest rates
TE global CPI inflation
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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https://ramakrishnavadlamudi.blogspot.com/
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