Bond markets think central banks are about to get tough. The yield on the benchmark ten-year US Treasury bond has risen above 2% for the first time since 2019 following this week’s data showing that US inflation hit 7% in December. Investors are betting that the Federal Reserve will be forced to raise interest rates seven times this year to get price rises under control.
Typically, investors demand higher yields for holding bonds that mature further in the future: the US two-year Treasury pays less than 1.6%, compared with 2% for the ten-year, say Davide Barbuscia and David Randall on Reuters. However, “yields of short-term US government debt have been rising fast this year, reflecting expectations of a series of rate hikes” while “longer-dated government bond yields have moved at a slower pace”. Hence the gap between the yield on short- and long-duration bonds has been falling. This trend – referred to as the yield curve “flattening” – implies that investors think tighter monetary policy will lead to slower growth.
So far, the bond sell-off has been “relatively broad and orderly”, says Marcus Ashworth on Bloomberg. Investors are starting to distinguish between classes of bonds again: riskier bonds have seen their yields rise more than safer government bonds. “Italy’s yield premium to Germany… is at the widest for more than a year.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Still, last year was the global bond market’s worst since 1999, says Mark Tinker in the Australian Financial Review. The start of 2022 has also been “absolutely terrible”. After years of almost free central bank money and expectations of low inflation, the market is now being forced to reprice. Inflation is soaring and central banks are preparing to sell some of their bond holdings. “The question for long-term investors… has to be ‘why own any bonds at all?’.”
-
Coventry Building Society bids £780m for Co-operative Bank - what could it mean for customers?Coventry Building Society has put in an offer of £780 million to buy Co-operative Bank. When will the potential deal happen and what could it mean for customers?
-
Review: Three magnificent Beachcomber resorts in MauritiusMoneyWeek Travel Ruth Emery explores the Indian Ocean island from Beachcomber resorts Shandrani, Trou aux Biches and Paradis
-
The industry at the heart of global technologyThe semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
-
Three emerging Asian markets to invest inProfessional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
-
What to consider before investing in small-cap indexesSmall-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
-
Why space investments are the way to go for investorsSpace investments will change our world beyond recognition, UK investors should take note
-
Time to tap into Africa’s mobile money boomFavourable demographics have put Africa on the path to growth when it comes to mobile money and digital banking
-
M&S is back in fashion: but how long can this success last?M&S has exceeded expectations in the past few years, but can it keep up the momentum?
-
The end of China’s boomLike the US, China too got fat on fake money. Now, China's doom is not far away.
-
Magic mushrooms — an investment boom or doom?Investing in these promising medical developments might see you embark on the trip of a lifetime.
