The time was in May 2019. The nominal bond yield I am referring to is the yield on the 10-year German Bund.
It has been nearly three years since the yield has been in positive territory
On Monday, January 10, 2022, the yield on the 10-year German Bund closed at a negative 0.03 percent. It closed on Tuesday at 0.03 percent.
And, what about other yields that have been in negative territory?
Well, on Friday, January 7, the yield on the Swiss government’s 10-year bond crossed over from negative territory and closed with a yield of 0.01 percent. The rate also closed in positive territory on Monday.
The yield on the 10-year French government bond moved into positive territory on December 8, 2021. The yield had crossed over into positive territory earlier than that but had drifted back to the negative side after earlier trips.
The yield on the French bond has been just under 30 basis points recently.
And, Japan? The yield on the Japanese 10-year government security moved into positive territory in early May 2020 and has remained in positive territory ever since.
In other words, interest rates appear to be rising around the world
Consequently, we are experiencing the interest rate structure returning to some idea of normality in the sense that we are not now expecting lenders to pay borrowers for the privilege of borrowers borrowing money.
When the world was moving toward negative interest rates, few actually believed that interest rates could exist in negative territory.
Well, the last three years or so and broken that belief.
So, now everything seems to be going back to the way things should be. That is, borrowers are now paying interest to lenders that are advancing them money.
Some yields may move back below a zero yield, but I believe that we are now moving back to positive rates across the board.
Reasons For The Rise In Yields
The major reason for the rise in yields is that inflation seems to be advancing as a global threat.
The Covid-19 pandemic has impacted supply chains and supply-side resources so that the shortages and tie-ups have resulted in prices rising.
Central banks have done their share in producing inflationary pressures as they fought against the effects of the pandemic and of economic recession.
But, there is the fact that governments have also injected money into economies thereby increasing the demand-side of the equation putting more pressure on prices.
And, inflation has risen.
The latestwho informs us that the annual rate of consumer price inflation in the area hit 5.8 percent in November.
This is the highest rate achieved for this area since May 1996.
The main areas of increase were energy prices and food prices.
U.K. prices were up by 5.1 percent for November.
Furthermore, eurozone inflation hit 5.0 percent in December 2021.
These numbers have contributed to the concerns now being expressed by the Bank of England and the European Central Bank.
The Bank of England did raise its policy rate of interest in December.
The European Central Bank has declared that it will halt its pandemic-era bond purchases in March.
The Federal Reserve System in the United States has already begun to “taper” its monthly purchases of securities, the end of the effort coming in March.
The Federal Reserve has also indicated that it could raise its policy rate of interest two, maybe three, times in 2022.
So, across the globe, interest rates are rising.
What Will Central Banks Do?
The major question is about what central banks might do over the course of this year.
The general belief is that the major central banks of the world are going to favor slightly higher interest rates.
But, exactly how this is going to take place is unknown because the major central banks are somewhat wary about committing themselves to future actions.
And, these major central banks don’t want to set off a selling panic in stock markets by announcing a plan for the future that is overly aggressive in terms of combatting inflation.
Central bankers seem to believe that the world is very sensitive to any efforts they might make to “tighten up” on money markets and/or reducing bank reserves now implanted in the balance sheets of commercial banks.
As a consequence, more and more analysts and investors are entering the new thought game about how will the Federal Reserve, and other major central banks, begin to shrink their balance sheets.
It is pretty clear now, however, that the Federal Reserve System, the Bank of England, and the European Central Bank will be supporting higher domestic rates of interest even though they do not want to be too aggressive about it.
I have made the assertion that the yield on the 10-year U.S. Treasury note will reach 2.5 percent by the end of 2022.
Tommy Stubbington and Martin Arnold, quote Sven Jari Stehn, chief European economist at Goldman Sachs in thedefending the view that the yield on the 10-year German Bund will reach a positive 0.3 percent by the end of the year.
I would suggest that this yield might even go a little higher, maybe jumping over 0.5 percent or more.
The World Has Shifted
It’s a risky thing to say that the world has changed, but I really believe that things are different now.
And, there is a new regime of thinking in place.
The economic policies that were built around the Phillips Curve in the past are no longer in force. The major economies of the world are in disequilibrium and distorted markets are the norm. Prices are responding to their own market situation.
The OECD price increase of 5.8 percent mentioned above contained energy prices that went up at a 28 percent year-over-year rate. Other sectors of the economy showed increases all over the board.
Debt levels are at all-time highs and there are major concerns about what a general rise in interest rate might do to companies that are not doing all that well but were able to obtain massive amounts of money due to all the money that is available at this time.
And, major transitions are taking place in markets and industries and economies transition into the information age.
The Federal Reserve, over the past two years or so,building up its balance sheet to its current size. No one quite knows, especially the Fed, how the Fed is going to get itself out of this situation.
Bond yields all over the world are going to rise. The rise, I believe, will not be pretty.