Global Investor

Global bond yields on an uptrend

Maulik Madhu | Updated on January 24, 2018

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Uncertainty about rate cuts holds up Indian yields too

In a reversal from the recent past, government bond yields world over have risen this year, surging from the levels in January. Expectations of an uptick in growth and receding fears about deflation in the US and Eurozone have pushed up bond yields. Improving growth prospects reduce the likelihood of future interest rate cuts, helping bond yields.

A reduced possibility of deflation also makes bonds less attractive to investors, thereby bringing down prices.

Fed watch

US bond yields have risen on indications of an improvement in the job market, the housing industry and consumer spending which have helped boost sentiment. The benchmark 10-year US Treasury yields, however, gave up some gains after the US Federal Reserve, in its policy review on Wednesday, pointed to a slower than expected pace of interest rate hikes in future.

Jitters over the Greek debt crisis, which raises the appeal of ultra-safe US Treasuries, also nudged yields southwards.

But with the US Fed not ruling out rate hikes (though at a slower pace) even as it has lowered the 2015 growth forecast to 1.8-2 per cent, the future trajectory of US bond yields is anybody’s guess.

ECB stimulus

In Europe, reversing its earlier slide, yields of the 10-year benchmark German Bund picked up sharply in April-end 2015.

This has led to a huge surge in Bund yields, which are the benchmark for Euro Zone borrowing costs.

Continuing monetary stimulus by the European Central Bank and the rise in crude oil prices, which has led to an upward revision of inflation expectation, is believed to have pushed up Bund yields.

The steepness of the yield rise, however, remains unexplained. Recently, with investors taking to the safety of German Bunds on the back of the looming Greek debt crisis, bond prices moved up and yields ticked down.

Yields on the 10-year UK Government bonds, which have picked up since May, are up 24 per cent year-to-date.

With the Bank of England keeping interest rates on hold on expectations of weak economic growth, bond yields have been trending upwards since May.

The central bank has revised the 2015 growth forecast downwards to 2.5 per cent from the earlier 2.9 per cent.

It has, in fact, trimmed the growth forecasts for 2016 and 2017 too.

Asian view

In Japan, government bond yields, weighed down by the Bank of Japan’s massive monetary stimulus, touched historically low levels in December-January.

The central bank’s surprise expansion of its ongoing bond purchase programme in October, in its efforts to achieve the target 2 per cent inflation rate, has had a role to play here too.

Since then the yields have recovered quite sharply.

Back home in India, giving the go-by to three successive rate cuts by the RBI beginning January 15, the 10-year benchmark bond yields have actually gained marginally since then.

With the RBI making it clear in the June policy review that any further rate cuts would be conditional on the future course of inflation and the monsoons, bond yields have firmed up further since then.

Published on June 28, 2015

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