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Japan faces a tough inflation-growth trade-off – and it’s not alone
Bond markets are nervous about central banks’ ability to contain inflation as South Korea, Indonesia and the Philippines face similar pressures
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Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.
Global bond markets are throwing a tantrum. On August 17, the yield on 30-year US Treasury bonds hit 5.3 per cent, its highest level since 2007 and up from 4.8 per cent as recently as June 29. The average yield on long-term debt across the Group of 7 advanced economies is the highest since 2008.
Several factors are at play. One of them is the surge in longer-dated debt issued by leading technology companies as they ramp up capital spending on artificial intelligence (AI), especially data centres. Another factor is mounting concern about governments’ ballooning public debts, exacerbated by the extra spending to protect households and businesses from the impact of the energy shock from the US-Israel war against Iran.
However, the political and economic constraints to tightening monetary policy are more consequential. In a report on August 17, Citadel Securities said the US Federal Reserve’s reluctance to raise interest rates despite a prolonged period of above-target inflation and the enduring resilience of the US economy is the key factor driving up yields on long-dated debt.
“The inability of policymakers to make progress on fixing the roof while the sun is shining is a key reason [long-term bond yields] remain so stubbornly high. So long as this persists, it will remain a risk for markets more broadly,” said Nohshad Shah at Citadel Securities.
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