The 30-year US Treasury hits 5.327%, its highest since 2007, while Bunds and Japanese government bonds reach levels not seen for decades. Brent surpasses 91 dollars and reignites fears about inflation. The Fed may be stopping, but the long-term cost of borrowing continues to rise.
The interest rate alarm returns to the financial markets. This time the signal does not come directly from central banks, but from government bonds.
Government bond yields are rising simultaneously in the United States, Europe and Japan, while oil returns above $91 a barrel. A combination that reignites fears about inflation and the cost of money.
Today the yield on the 30-year US Treasury reached 5.327%, the highest since 2007. The US 10-year bond reached close to 4.7%. In Japan the yield on the 10-year bond reached 2.945%, the highest in around thirty years, while the German Bund reached its highest levels since 2011.
The rise in yields on bond markets is, therefore, bringing a question back to the center of attention: why do market rates continue to rise if the Federal Reserve could instead decide to stop?
Because rates rise even if the Fed could stop
The answer is that the rates decided by central banks and government bond yields are not the same thing.
The Fed decides the official cost of money in the United States, but the yield on a government bond that matures in ten, twenty or thirty years also depends on what investors expect for the future.
If fears about inflation, public debt or the ability of governments to finance spending increase, bond buyers demand a higher yield and that is precisely what is happening at the moment.
After some weaker data on the American economy, the market considers a new Fed rate hike in September less likely, but at the same time fears that inflation, oil and debt could keep the cost of money high for a long time to come.
Oil above 91 dollars, the risk of inflation returns
One of the main pressure factors is oil.
Brent surpassed $91 a barrel, supported by new tensions between the United States and Iran and concerns about supplies through the Strait of Hormuz.
The problem is not just about the price of petrol.
More expensive oil can increase the costs of transportation and industrial production and, over time, pass through to the prices paid by families and businesses. In other words, it can make inflation more difficult to come down.
It is precisely this risk that worries those who invest in government bonds. If inflation remains high for longer, the returns investors demand tend to rise as well.
Public debt also weighs heavily
Then there is a second element: debt.
The United States must continue to finance very high public spending and therefore place large quantities of securities on the market.
As the supply of bonds grows, it may be necessary to offer higher yields to attract buyers.
The phenomenon does not only concern the United States. Even in Europe, investors are looking more carefully at the growth in public spending and future costs linked, among other things, to defense and investments.
The result is that yields can rise even without a new tightening by central banks.
The stock markets are back under pressure
The rise in market rates also has immediate consequences on the stock markets.
The European Stoxx 600 opened down 0.2%, while in Asia the Nikkei had lost more than 2%.
For investors, government bonds with higher yields become a more attractive alternative to shares.
Additionally, higher rates also mean more expensive financing for businesses. It becomes more expensive to apply for credit, issue bonds or refinance existing debts.
The effect tends to weigh especially on the most indebted companies and on stocks that base much of their value on profits expected in future years.
What it means for Italy, families and businesses
The topic also directly concerns Italy.
When talking about BTPs, attention often focuses on the spread with the German Bund. But there is also another element to consider: the general level of European rates.
If government bond yields rise across Europe, the cost with which Italy finances its debt may also increase, even without a strong growth in the spread.
Over time, higher market rates may also pass through to the cost of business loans and household financing.
This means that a prolonged phase of high yields can continue to weigh on the economy even if the ECB and the Fed decide not to increase their official rates yet.
The real risk is that money will remain expensive for longer
This is the main message coming from the markets today.
Central banks may be nearing the end of their rate hike phase, but this does not automatically mean that the cost of borrowing will start to fall immediately.
Oil, inflation, government debt and geopolitical tensions can keep yields high for a long time.
The next important event will arrive tomorrow, Wednesday 19 August, when the Federal Reserve will publish the minutes of the FOMC meeting of 28 and 29 July. Investors will be looking for clues on the US central bank’s next moves.
However, the signal coming from the markets is already clear: even with a more prudent Fed, the interest rate alarm has not yet subsided.
