We haven’t written about bond yields for some time. Government bond yields have largely been falling despite Central Banks announcing reductions or end to their bond buying programmes.
The only notable countries where yields are still up over the past year are the United States, Canada, Italy and Emerging Markets.
It wouldn’t appear that the market is anticipating interest rate rises in the short term. We will write about that in a few days but in the meanwhile here are 10-year government bond yields as of 14th July 2018 (figure in brackets indicate absolute 1-year change),
Everyone seems to be focussing on the equity markets recently, but equity markets haven’t really moved much over the past one month. Over the past month, major equity markets have lost between 1.5% to 4%.
The real action is in bonds and commodities. And trade seems to be flourishing too.
10-year government bond yields of major economies are lower by 5% to 40% (in relative terms not absolute terms) in just the past month. 10-year German bonds are down 12 bps over the past month. That wouldn’t sound much but they are down 28% from 42 bps to 30 bps. U.K. yields are down 8%, U.S. yields down 5%, Japanese yields down 40%. Even Greek yields are down 20% over just the past month. Does the market anticipate a pause in interest rate rises? It would appear so.
The European Central Bank (ECB) announced on Wednesday that it will halve its bond buys to 15 billion Euros (from the current 30 billion Euros) a month from October then shut the programme at the end of the year.
ECB’s balance sheet has increased by 2 trillion Euros since 2015 when it announced its bond buying programme. 2-year yields for most of the Eurozone countries are currently negative and 10-year yields in most cases are lower than that of the United States. The European Central Bank (ECB) is by far the biggest holder of European bonds and the biggest (almost 90%) buyer of the weaker Eurozone (Italy, Spain, Portugal and Greece) countries debt since 2015. The ECB balance sheet is now over 4.5 trillion Euros, some 45% of Eurozone GDP.
Even 10-year yields for Japan and Switzerland are barely positive.
Yields on government bonds for all maturities over 3 months have never been lower in the history of the world .
Some 80% of 10-year Japanese government bonds are held by the Bank of Japan. And apparently there are days when no one trades those 10-year bonds because there is no point of trading it. Why? Well, because the Bank of Japan has a policy to control yield curves and since they hold majority of it there are hardly any price movements.
We recently wrote about the impact of rising interest rates for UK households, read more about it here. We also wrote about the impact of higher bond yields for the US government, read more about it here.
Impact of higher interest rates for the UK Government
The UK government has around £1.72 trillion in debt and pays around £36 billion in interest payments a year (an effective interest rate of 2%).
The UK tax revenues are around £800 billion a year, which would mean 4.5% of all tax revenues are paid as interest. The UK has paid £540 billion in interest since it last ran a surplus in 2001.
The US 10-year bond yield soared to 3.09% today (up 75 bps over the past year and 25 bps over the past month), the highest since 2011. The 2-year yield hit 2.59%, the highest since August 2008 (read more here on the financial impact of rising yields for the US Government).
The bigger story is of emerging markets though. Brazilian and Indian 10-year yields have soared 33 bps in just a week. The Brazilian 10-year bond yield topped 10.12% while the Indian 10-year bond yield topped 7.91%. The US dollar has gained 7% against the Brazilian Real and 4% against the Indian Rupee over the past month.
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