Global bond markets are in turmoil again.
Fears that interest rates will remain high for a long time Since As central banks grapple with persistent inflation, this has triggered a sell-off as investors reassess risk.
Some analysts believe a “slow train wreck” in bond markets will trigger a prolonged period of economic crisis.
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They say a repeat of the 1987 stock market crash, dubbed «Black Monday,» now poses a real risk.
US 10-year borrowing costs have risen nearly 50% over the past six months. , while UK 30-year gold bond yields hit their highest level since 1998.
Yields in Italy and Germany jumped to levels not seen in more than a decade, and even Japan was not spared from a roll upward.
Stock markets are also under strain, with Wall Street's S&P 500 index down nearly 6% over the past month. The FTSE 100 index in London is also unchanged over the past four weeks.
Bill Blaine, market strategist at Shard Capital, is one of the analysts experiencing a sense of déjà vu.
He said financial markets are now faced with an “existential crisis” that “may or may not be short-lived.”
Mr Blaine added: “Bond yields are rising in anticipation of higher levels for a long time. Markets are concerned about debt, currency stability and politics. I can't help but remember: We've been here before.”
Why are bond yields rising?
Higher inflation and rising interest rates are driving down the value of government bonds, which mostly offer fixed returns.
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Bonds therefore become less attractive due to the prospect of continued inflation, with yields rising as bond prices fall.
A surprise jump in U.S. job openings on Tuesday suggests the labor market in the world's largest economy remains tight, which could prompt the Federal Reserve to raise interest rates further.
Rising long-term government borrowing costs suggest traders expect interest rates to remain high for a long time due to the strength of the world's largest economy.
Hope for tax cuts dashed .
Rising government bond yields mean higher interest payments on debt. In March, the Office for Budget Responsibility (OBR), the government's tax and spending watchdog, said the cost of servicing Britain's £2 trillion debt this financial year was expected to be around £100 billion.
< p>This happened before. Borrowing costs in the UK have started to rise.
Jeremy Hunt recently received the OBR's initial verdict on the economy as part of its forecasting process ahead of the Autumn Statement.
This is the first forecast of how this will happen. impact on the public finances, which arrived in his inbox on Wednesday.
His comments at the Tory party conference suggest he knows money is tight as he says talk of tax cuts has simply grown into an “academic” discussion.< /p>
«Our interest payments on our debt have gone up so much in the last six months that I don't think we'll be able to do anything [great],» he told the audience at the conference meeting.
Sir Charlie Bean, a former OBR official, believes rising borrowing will add about £20 billion to the UK's debt interest bill by 2027.
This will add to an already growing pile of debt and is likely to wipe out the £6bn cushion Hunt needs to achieve to achieve debt reduction.
Mortgage pain remains
Higher bond yields will bring a mixed picture for homeowners.
First, it will stop mortgage rates from falling further, says Andrew Wishart of Capital Economics.
But he says the impact on the mortgage market will vary depending on the duration time. buyers fix their prices.
Because the rise in bond yields has been driven by expectations that interest rates will remain high for a long time, it is longer-term yields that have risen the most.
“As a result, it's really the five-year note. The swap rate, rather than the two-year rate, has moved more markedly,” Mr Wishart said.
Five-year swaps, which influence the pricing of five-year fixed rates, jumped to 4.7%, i.e. from 4.4% two weeks ago.
«This should lead to higher interest rates on five-year fixes compared to two-year fixes,» Mr Wishart said.
This would be a particular blow to borrowers as five-year deals were the cheapest on the market.
This would be a particular blow to borrowers as five-year deals were the cheapest on the market.
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According to Moneyfacts, the average two-year fixed rate on Wednesday was 6.46%, and the average five-year rate was 5.96%.
If the increase in five-year swaps continues and it directly impacts mortgage rates, it will add £37 a month to the cost. take out a typical loan of £200,000.
However, this is not a given and there may be differences between lenders.
Brokers said some large banks still have room for further minor cuts as they have been slow to respond to Swap rates fell in the summer as better-than-expected inflation data sent interest rate expectations soaring.
HSBC announced it would cut its fixed rates from Thursday. It follows recent cuts at Coventry, NatWest and Nationwide.
Nick Mendes of mortgage broker John Charcol said: “There is scope for further cuts. This is because the current fixed rate margin is still highly dependent on when swap rates were higher a month ago.»
The market will continue to fluctuate
Stock markets are not the economy, at least not that way it says.
But Simon French, chief economist at Panmure Gordon, said prolonged turmoil would inevitably impact consumers.
He said: “If they move into consumer and business lending, that's a tightening of economic conditions.” , which makes the prospects much less favorable. It's crazy to think that this is limited to financial markets.»
But Mr French adds that tighter financial conditions will take some of the heavy lifting off the Bank of England, which may not have to raise interest rates further to tighten the economy. Rates are already 5.25%.
Ben Gold, head of investment at consultancy XPS Pensions, says rising long-term borrowing costs are unlikely to threaten pension funds to the extent they did a year ago.
So-called liability-driven investment (LDI) strategies, which typically act as insurance policies during periods of prolonged periods of low interest rates, have plunged the sector into crisis as borrowing costs soared.
Sudden surge last year After mini-budget, some funds found themselves on the verge of collapse. But Mr Gold says the funds now have much more collateral to meet cash flow requirements.
“Typically, before the crisis, LDI funds on average had enough collateral to cover yield increases of up to 2.5%. Now it's more like 4%.
But Gold warns that the ability of central banks to control inflation is still in question.
He said: “There are also question marks about whether interest rates have reached peak rates. With so much government debt and central banks also trying to sell bonds accumulated during the financial crisis (and Covid), that's a huge amount of government debt that will be pushed back into the market at some point. This alone will put pressure on yields.”
Volatility will continue.
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