Bond markets are approaching a painful inflection point

This week’s bond crash pushed the Group of Seven countries’ average 10-year borrowing cost to its highest level in more than a decade, with the average yield exceeding 3%. What happens next could set the tone for financial markets and the global economy for years to come. And your guess is as bad as mine about where fixed income markets go from here.

It’s not just traders and investors who will feel the pain of rising government bond yields. Businesses looking to borrow to invest and homebuyers trying to afford a mortgage will all face much higher interest rates than the world has grown accustomed to for much of the 21st century. .

The 10-year US Treasury yield – the benchmark for global debt markets – hit its highest level since October 2008 this week. Germany’s 10-year yield, which sets the tone for eurozone bond markets, hit its highest level in more than a decade. Thanks to a push from a giant tax cut package from a three-week-old government, Britain’s 30-year gilt yield hit its highest level in nearly a quarter-century before the Bank of England intervene to ease the pressure. The rise in public debt costs has been unrelenting.

For the G-7 countries, comprising Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, the average 10-year yield is approaching an inflection point key. At around 3.15%, it is already well above the 1.3% average seen over the past decade. And if the Bank of Japan didn’t spend billions of yen to keep its benchmark yield below 0.25%, that average would be even higher.

The current high level of consumer prices, which belatedly prompted central banks to raise official interest rates, does not bode well for bond yields. After years of keeping inflation below their 2% targets, the guardians of monetary stability have been caught napping at the wheel. The current G-7 average of 7.2% is well above the two-decade average of 1.7%, the one-decade level of 1.6%, or the 2002-2012 average of 1. 8%.

Skyrocketing inflation suggests that central banks will need to tighten policy further in the coming months to bring consumer prices under control. The average G-7 official interest rate is around 1.75% (although, again, removing Japan’s cost of borrowing skews the numbers somewhat), after hovering around zero in over the past two years. That doesn’t seem high enough to bring prices in line.

We haven’t even begun to worry about the impact high and rising borrowing costs will have on equities. As stocks floated to record highs on borrowing costs that were around – and below – zero, the best advice now is probably: “Don’t look down.” The total global market capitalization is currently around $90 trillion; while that’s 47% higher than when the pandemic grounded economies in the first quarter of 2020, it’s 25% below its November peak.

“I used to think if there was reincarnation, I wanted to come back as president or pope or .400 baseball hitter. But now I want to come back as a bond market. You can bully anybody,” James Carville, political consultant to President Bill Clinton, told The Wall Street Journal in 1993.

The bond market has certainly intimidated the world this year. The test in the days, weeks and months ahead will be whether this G-7 average rises above the 3.5% average that prevailed between 2002 and 2012, or declines closer to its level of around 2.4%. over two decades. But it seems safe to say that we won’t be reversing the 1.3% average of the past decade anytime soon.

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. A former London bureau chief of Bloomberg News, he is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

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