For Larry Fink of BlackRock Inc. and Bill Ackman of Pershing Square Capital, the current trend may not be over yet.
Bond markets finally seem to have grasped what central bankers have been warning about for some time: high interest rates are here to stay.
From the United States to Germany to Japan, returns that seemed almost unthinkable at the start of 2023 are now within reach. Yields on 10-year German bonds are approaching 3%, a level not reached since 2011. Their US counterparts are back in line with their pre-Global Financial Crisis average and within reach of 5%. The question now is how much higher they can go, with no real threshold in sight after key levels have been breached. The implications extend far beyond markets to the rates paid for mortgages, student loans, and credit cards, and to the growth of the global economy itself.
Oil prices are rising, the US government is accumulating more debt and is at risk of another shutdown, and tensions with China are rising. For anyone who doubted the tough anti-inflation words of Jerome Powell and Christine Lagarde, the outcome is not positive.
“What happened over the last few months was essentially that markets were wrong because they thought inflation was going to come down quickly and that central banks were going to be very accommodative,” said Frederic Dodard, head of asset allocation at State Street Global Advisors. “Everything will depend on how inflation settles in the medium to long term, but it is fair to say that we have moved away from the ultra-low yield regime.”
Some of the world’s most prominent investors, including Larry Fink of BlackRock Inc. and Bill Ackman of Pershing Square Capital, are among those who argue that the current trend may not be over yet.
The German 10-year yield just posted its biggest monthly increase this year. Japanese government bonds saw their worst quarterly decline in a quarter century and the U.S. 30-year yield posted its biggest quarterly rise since 2009.
“My view is that we will definitely have 10-year rates at least 5% or higher because of this structural inflation. This structural inflation is unlike anything else. And I think business leaders and politicians are not providing the basis to explain all of this,” Fink said during a conversation with Bloomberg’s Dani Burger at the Berlin Global Dialogue forum.
Meanwhile, central banks continued to try to give a clear message to the market.
Fed officials have mostly maintained their mantra of higher rates for longer. In Europe, ECB President Lagarde is strongly opposing the idea of an imminent pause. He told the European Parliament that the central bank will keep interest rates at sufficiently restrictive levels for as long as necessary to contain inflation.
Some bond market participants, such as T. Rowe Price, adjusted to September’s decline, reversing long bets on Treasuries. There were big trades in Treasury bond futures pointing to a steeper curve and higher long-term yields.
Until now, rate increases implemented by central banks had hit shorter maturities the most, pushing yields higher and resulting in deeply inverted curves. Recession expectations, coupled with rate cuts, had kept long-term yields anchored.
But in the United States at least, that recession never arrived, forcing investors to rule out monetary easing. European economies have proven less resilient, but the ECB, which has a unique price stability mandate, has reiterated several times that it is too early to talk about easing inflation still well above its 2% target.
Exacerbating government bond swings is an increase in the risk premium that investors demand to hold longer-dated government bonds. In Europe, the so-called risk premium could add 50 basis points to 10-year yields, according to Societe Generale.
Also notable is a revised forecast by Goldman Sachs strategists, who now predict that 10-year government bonds will close the year at 4.30%. While that’s about 40 basis points higher than their previous target, it’s below current levels.
Global head of multi-asset at Candriam Nadège Dufossé says the current market trend may not have much more to offer and is gradually considering a move towards longer maturities.
“We believe we are at the end of this movement, with signs of decelerating inflation and weakening economies in Europe,” he said.
Even as long-term pressure begins to ease, another major test is ahead as the Bank of Japan moves closer to policy normalization. Yields have already risen to record highs despite policymakers’ efforts to curb swings.
But even as the inflation picture continues to weaken in the United States and elsewhere, it is clear that markets are in a new world.
“Maybe we’re going back to what the world looked like before 2008,” said Rob Robis, chief global fixed income strategist at BCA Research. “The period after Lehman, before Covid, was characterized by inflation that struggled to stay at 2%, rather fluctuating growth and central banks forced to keep rates very low for longer”.
Original article published on Money.it Italy 2023-10-07 07:03:00. Original title: Perché i rendimenti sul mercato obbligazionario continueranno a salire?
