eco TV

The bond market turmoil: causes and consequences

3/11/2021

In recent months, US government bond yields increased significantly on the back of higher inflation expectations but more recently, higher real rates have been the key driver. The latter development is in turn related to the prospect of massive additional fiscal stimulus. Unsurprisingly, the dynamics in the Treasury market have had global spillover effects, raising concern about an unwanted tightening of financial conditions.

TRANSCRIPT // The bond market turmoil: causes and consequences : March 2021

3 QUESTIONS

FRANÇOIS DOUX

The upturn in long-term rates is a key theme that has been bothering the financial markets since the beginning of the year.

William De Vijlder, hello.

WILLIAM DE VIJLDER

Hello François.

FRANÇOIS DOUX

You have spoken about angry bond markets, and your words were picked up in the press. First question: what is causing the upturn in long-term rates?

WILLIAM DE VIJLDER

Financial market expectations are mainly to blame: inflation is expected to pick up in the months and quarters ahead, and the recovery is also expected to accelerate. Three fundamental factors also come into play: a very accommodating monetary policy, the successful rollout of vaccination campaigns in the United States, and above all, the USD 1.9 trillion rescue plan that is looming on the horizon. Together, these three factors will give the US economy a real boost.

FRANÇOIS DOUX

Indeed, we mainly talk about the US economy, and 30-year Treasury bonds in particular. Second question: what are the short-term consequences of the upturn in the long end?

WILLIAM DE VIJLDER

I would begin by saying the consequences are the same as always. This trend has also affected other bond markets around the world. It is a matter of great importance, notably for the eurozone, where the economic cycle has become desynchronized with regard to the prospects for an economic recovery in the US. At the same time, the financial and bond market cycles are still synchronised. This has triggered several remarks and verbal interventions by the European Central Bank.

There have even been bond market interventions in Australia, since their policy is to target the level of interest rates. The repercussions have been global. As to the United States, however, there is no need to panic. Why? Because inflationary momentum is slow. It should not be exaggerated. There is a limit to how much the yield curve can be expected to steepen in reaction to inflationary fears, or in reaction to expectations of a tightening of US monetary policy.

FRANÇOIS DOUX

My third and final question: what are the medium-term consequences of the upturn in long-term rates? After all, it does signal a decline in bond prices?

WILLIAM DE VIJLDER

This is where things become much more delicate. Indeed, to a certain extent, what we are observing today is rather ironic. For years now, we have been pursuing an extremely accommodating monetary policy in the hopes of boosting inflation. Today, the conditions have finally come together for inflation to pick up. So the markets are beginning to fret. The markets are always worrying about something. For the bond markets, the big worry is “what will the Federal Reserve do next? How will it handle the transition from a very accommodating monetary policy to a more normalised policy? How will it announce the transition?” The Federal Reserve faces a very perilous balancing act and will need to be extremely cautious in all its communications. Why? To avoid creating a shock like the “taper tantrum” of 2013, when the Fed triggered a bond market crisis. Under all circumstances, it must avoid triggering a similar shock, which would have a detrimental impact not only on the financial markets, and of course the stock market, but also on the real economy. The housing market also comes to mind, and the real-estate sector in general, as well as corporate financing conditions.

FRANÇOIS DOUX

US long-term rates remain the key benchmark for the rest of the economy.

WILLIAM DE VIJLDER

That’s right.

FRANÇOIS DOUX

Thank you, William De Vijlder, for this update. We will keep an eye on the evolution of long-term rates. Tune in again in April for another edition of EcoTV.

View more videos Eco TV

On the Same Theme

Central bank digital currency: what are we talking about ? 6/10/2021
While central banks are considering whether (or not) to launch their own digital currencies so as to counter private crypto-assets, the design of these central bank digital currencies will be of the utmost importance with regard to their consequences on the financing of the economy and the monetary policy transmission.
PMI: price pressures continue to build, reaching very high levels 6/7/2021
The global manufacturing hardly moved in May, which shouldn’t come as a surprise, given its already high level. There was little change in the new export orders at the global level. 
Economic outlook: spring is in the air 4/9/2021
Economic statistics for the first part of this year are better than expected, including in Japan and the euro area. Moreover, this development is broadening in terms of sectors. Looking at business surveys, there is a growing feeling of beginning to “see the light at the end of the tunnel”.
Bitcoin’s buyer beware 3/15/2021
Based on an overview of the functions of a currency, cryptocurrencies should be considered as an investment instrument, rather than as an alternative to fiat money. Since the start of 2020, correlations between bitcoin and copper, equities and, in particular, breakeven inflation have increased. Probably, investors turn to bitcoin when inflation expectations are on the rise. Swings in investor sentiment also play a role. The extent of the change in the bitcoin price suggests that speculative waves are at work, driven by momentum buying and extrapolative expectations of price appreciation. When the fundamental value of an instrument like a cryptocurrency is very hard if not impossible to determine and when short-term price changes are a multiple of those observed in equity markets, caution should prevail when building and managing an exposure.
Does the rise of bond yields call for yield curve control? 3/5/2021
In the US, the prospect of a huge additional fiscal stimulus against a background of a fast pace of vaccination, has recently caused a significant increase in Treasury yields.
The migration of risk in 2021 1/15/2021
Risk and uncertainty never disappear but their nature, intensity and economic consequences evolve over time. 2021 should be the perfect illustration.
Special Edition – 2021: hopes and challenges 1/7/2021
2021 is a year of hope with the arrival of vaccines. Health-related and economic uncertainty should ease significantly, and better visibility will help boost consumer and business confidence and thus drive economic growth. It is also a year of hope for the climate thanks to European initiatives and the prospect of a change of policy direction in the US. But these hopes bring challenges. How will we manage government debt? How might financial markets react if growth surprises on the upside?
What difference will the pace of vaccination make for the economy? 1/7/2021
The introduction of vaccines will enable the global economy to make the shift from a stuttering recovery, shaped by a series of lockdowns and their relaxations, towards a steadier growth trend. A key factor will be the gradual reduction in uncertainty, which will encourage households to spend and businesses to invest. The quicker we reach collective immunity, the stronger this economic momentum will be.
2020: Entering a new era 12/18/2020
From an economic perspective, 2020 will go down in history for obvious reasons – the consequences of the Covid-19 pandemic – but also because we have entered a new era.
2020 economic review: agile responses to the Covid-19 shock 12/11/2020
Covid-19 represents an exogenous shock to the global economy of unseen proportions in recent decades. The reaction has been swift and agile. Central banks have eased policy and injected liquidity whereas governments have put fiscal discipline aside and used their budgets to bring much-needed support.  This has softened the blow from the pandemic. What has also played a role is the agility of companies by adapting their production and/or distribution models to cope with the disruption of supply chains and the impact of restrictions on sales and by making it possible for a lot of their staff to work from home. Most importantly, the development of a vaccine brings hope at the end of a very difficult and challenging year. Vaccination should lead to a lasting economic recovery although questions remain about the possible longer-lasting impact of the pandemic in terms of unemployment and corporate as well as public sector indebtedness.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 2732 articles and 723 videos