Investors continue to watch bond markets in Europe and the US with concern. The question is no longer simply how much further yields could rise in the short term. Instead, financial markets are increasingly beginning to price in a new long-term normal for interest rates.
In Europe, yield spreads between individual member states are moving back into focus, with French government bonds in particular coming under pressure. In the US, high yields are also feeding directly into financing costs for companies and consumers. High energy prices, inflation concerns, rising policy rates and enormous levels of public debt currently represent a difficult combination for bond markets.
The crucial factor, however, is one of adjustment. It is not necessarily today’s interest-rate environment that is historically unusual; it was the extremely low rates of recent years. Governments, companies and investors now have to adjust to this new reality.
Asian markets are also providing cautious leads. In Japan, stronger-than-expected consumer price inflation in the Tokyo metropolitan area is adding to interest-rate pressures, while the Hong Kong equity market is catching up with Wall Street’s previous losses following the holiday break.
Against this backdrop, cautious trading appears likely ahead of the weekend. In addition to developments in the Middle East and the resulting disruption to energy supplies, attention is focused primarily on the US labour market data. These figures could feed directly through the bond market into equity prices. Strong data would signal a resilient economy, but could simultaneously push yields higher again.
