Global Bond Yields May Continue to Climb

Global bond yields may continue to climb as central banks worldwide tighten their monetary policies. This week, the U.S. Federal Reserve, Bank of England (BOE), and Swiss National Bank (SNB) boosted their benchmark lending rates to rein in inflation. 

On Wednesday, the Federal Open Market Committee (FOMC) lifted the fed funds rate target range by 75 bp to 1.50%/1.75%, the biggest rate hike since 1994, and Fed Chair Powell said it is too soon to declare victory over inflation.  The Fed also boosted expectations for where the funds rate will be next year to a median of 3.8% from the previous projection of 2.8%.  The surge in yields has been relentless over the past 3-months as the 10-year T-note yield surged from 1.666% in early March to an 11-year high of 3.497% on Tuesday.

European bond yields also continue to soar.  After the SNB today unexpectedly raised its policy rate by 50 bp to -0.25%, its first increase in 15 years, the 10-year German bund yield surged to an 8-year high of 1.928%.  Also, after the BOE hiked its benchmark lending rate today by 25 bp for the fifth consecutive meeting, the yield on the 10-year UK gilt rose to a 7-3/4 year high of 2.742%.

The era of record-low yields, that is now ending, was fueled by years of stimulus from central banks in the wake of the 2008 financial crisis, a period when central bankers faced little pressure because inflation remained relatively tame.  However, the dynamics are reversing worldwide, with consumer prices surging and central banks unwinding the massive bond portfolios they amassed by injecting cash into the financial system with their quantitative easing (QE) programs. 

The peak for global bond yields will ultimately depend on the economy's direction and whether central bankers can bring inflation down.  Some external factors may keep price pressures elevated, which might keep the world’s central banks hawkish for longer.  For example, the war in Ukraine has boosted many commodity prices, and the pandemic's resurgence in China has kept lockdowns in place that have snarled global supply chains and fueled increases in shipping costs.  In addition, the OPEC+ cartel has been very successful in artificially restricting oil supply and causing the price of crude oil and gasoline to soar.  Until these situations resolve, or the world economy falls into recession, global bond yields may keep climbing.