BreakingViews: Bonds signal confusion, not cheer

Published Mon, Sep 19 20164:46 PM EDT

Breakingviews

Peter Thal Larsen

Rising long-term government bond yields are usually a sign of economic optimism. Not this time. Yields on 10-year sovereign debt have perked up. Yet borrowing costs remain ultra-low, and the upward drift most likely reflects uncertainty about central bank policies. More from Breakingviews : Trading really is about survival of the fittest It's a sign of the times that movements measured in tenths of one percent are even worth noting. Ten-year U.S. Treasury bonds now yield 1.69 percent – up from 1.37 percent in early July, but still well below the 2.3 percent yield the benchmark offered at the beginning of the year. The shift is striking because the price of long-term government bonds has fallen across the developed world, raising yields or, in the case of Japan, making them less negative. This reversal partly reflects relief at the limited economic fallout from Britain's vote in June to leave the European Union, which prompted a global scramble for safety. But central banks are also showing their influence. For example, a recent bump in yields came after the European Central Bank, currently spending about 80 billion euros on bonds each month, decided not to add to its purchases. Meanwhile, rate-setters seem to be waking up to the fact that their efforts to force down borrowing costs can have unpleasant side effects. Lower yields raise the value of future liabilities for pension funds and insurance companies, prompting them to buy more government bonds, which in turn pushes yields even lower. Banks also find it harder to make money when long-term borrowing costs are low. That is why the Bank of Japan is considering scaling back its purchases of super-long-dated debt, Reuters reported on Sept. 14. And of course savers prefer higher rates. Even so, apart from the U.S. Federal Reserve, which may raise rates again before the end of the year, no major central bank is publicly considering tighter monetary policy. It's also not as if yields are marching higher with great force – they are still very low. The Bank for International Settlements (BIS) notes that bond yields in the developed world have been below nominal GDP growth rates for some time. That implies investors are expecting a continued slowdown. If growth or inflation were to pick up, yields could surge. As it is, government bonds seem to be signalling confusion rather than cheer about the world economy. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

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