PARIS: Governments face a rise in their borrowing costs due to the winding down of monetary stimulus programmes and as investors bet on central banks hiking interest rates sooner than promised.
Moody’s Analytics warned this week that “US rates could rise as the Fed moves to slow its purchases of long-term debt, which in turn could push up the yields on European government bonds.”
That has already begun.
The yield on the debt of the United States and top European countries, as well as emerging economies, has risen recently as investors bet that the US Federal Reserve could begin as soon as in September to lower the amount of monetary stimulus it injects into the economy.
The $85bn (¤64bn) per month that the Fed has ploughed into the US economy led to lower bond yields in the US, as well in many other countries as easy money went abroad from the US in search of somewhat higher risk and yields elsewhere.
But recently, investors have factored in the prospect of the easy money tap being slowly closed down. This has pushed up yields on US Treasury bonds, and has caused some of the money placed abroad to be withdrawn, pushing up sovereign bond yields elsewhere.
The rate of return for investors on 10-year US Treasuries rose to 2-year highs this past week, implying a more than 50 percent increase in US borrowing costs since the beginning of the year.
On Friday, 10-year Treasuries were trading at 2.812 percent, up from 2.689 percent at the beginning of the month and 1.828 percent at the beginning of the year.
Ten-year British gilts were at 2.704 percent Friday, up from 2.401 percent at the beginning of August and 1.990 percent at the beginning of the year.
At the height of the eurozone debt crisis, some eurozone money flowed into less risky bonds, such as French debt. But as the debt crisis eases, bond yields for the countries in trouble have fallen and there are signs that yields on the safe haven countries may rise, with French bonds being closely watched.
For Germany, the yield on 10-year Bunds was 1.881 percent on Friday, up from 1.667 percent at the beginning of the month and 1.442 percent at the beginning of 2013.
France’s 10-year bonds yielded 2.400 percent Friday, up from 2.223 percent at the beginning of August and 2.077 percent at the beginning of the year.
The drop in sovereign bond yields to exceptionally low levels, thanks to the ultra-low interest rates set by central banks and huge monetary stimulus programmes, have masked the debt problems the countries face.
Now their governments face having to pay more to finance new debt as their borrowing costs rise in line with the yields on the secondary market where debt issued previously is traded.
The rise in sovereign yields has come even though central banks have pledged to keep those near-zero rates for the foreseeable future. Bond analyst Rene Defossez at French investment bank Natixis said investors are starting to bet that the signs of economic recovery which justify the winding down of stimulus may induce central banks to raise rates sooner than they suggest.
“The factors which are pushing yields higher are tending to prevail” over the interest rate guidance issued by central banks.