Government bond rates: inflationary data is not enough to make them grow
What if all the inflation we are talking about did not affect bond yields? Because this is the great doubt that many are asking themselves on the matter. A few months of high inflation rates in both the US and Europe were expected to skyrocket government bond yields, and many were already preparing to sell off or, like Michael Burry, had taken short positions. However, to paraphrase some Yiddish wisdom: the man plans and the markets laugh. The year-to-date 2021 high for 10-year Treasury bond yields was March 19, at 1.74%, for the US, which was slightly leading. However, the United States were not the only ones to see a trend in rates rather indifferent to inflation.
- 10-year German Bund yields hit -0.11% in mid-May and are now -0.25%
- UK 10-year Gilts also peaked in 2021 in mid-May, at 0.89%, but are now at 0.74%
- Japanese 10-year government bonds hit a 5-year high at the end of February 2021 at 0.17% but are now 0.08%
- even the Italian BTPs, after having reached a maximum in early May, exceeding one per cent, fell to a value between 0.7% and 0.8%.
Yet central banks have been fairly steady in their government bond buying activities,
A rational investor cannot just think that, sooner or later, rates will rise anyway, because times are as important as, if not more, than the forecasts themselves.
So what's really going on with government bonds? The market is simply more rational than investors, and does what it has always done in the past …
Consider this graph of 10-year Treasury bond yields (solid black line) and CPI index inflation (red dashed line) from 1962 to today:
Here's what we see:
- The left side of the graph was a period of rising US inflation due to the Vietnam War, Big Society spending, and easy monetary policy. Yields rose, although not exactly in line with inflation. For example, they remained largely the same even as inflation rose during the 1973 oil shock (second gray bar of recession from the left).
- The central part of the graph, from 1981 to 2007, shows that 10-year yields have remained much higher than underlying inflation for 26 consecutive years. For a market that many consider to be the most efficient in the world, this is a significant discrepancy between prices and reality.
- Only in the far right of the graph do we see that US government bond yields align more often with current inflation, especially at the beginning (2010 – 2011) and at the end (2017 – 2019) of the last cycle. After over two decades
This graph and the story then show us that to have a real change in interest rates you need to have something more than a couple of months of rising inflation rates. Interest rates tend to adapt to inflation rates but on a perspective that, at the very least, spans several months, if not a few years, whether the adjustment is up or down.
This time it might be different, sure, but still, there's no reason to see breaks in decades-long trends, if not even longer.
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The article Rates of government bonds: inflationary data is not enough to make them grow comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/tassi-dei-titoli-di-stato-non-basta-un-dato-inflazionistico-a-farli-crescere/ on Tue, 15 Jun 2021 09:00:06 +0000.