Pressure from the Middle East: Bond yields of developed economies reach highest since 2008 crisis
Government financing costs in several developed economies have hit their highest levels since the 2008 financial crisis. Investors fear that the Middle East crisis will sustain high inflation.
The financing costs of governments in several developed economies rose on Monday to their highest level since the 2008 financial crisis, and in some cases to levels not seen for even longer. This is due to investor concerns that the crisis with Iran will keep inflation at a high level for a long time, according to an article in The Guardian. Concerns about rising prices and government spending have increased the debt costs of France, Germany, the USA, Japan, and the UK, against the backdrop of fears that high price indices will lead to interest rate hikes in a series of leading countries.
The yield on 30-year French government bonds rose to 4.8558%, its highest level since September 2008. The yield on France's 10-year government bonds reached 4.0516%, the highest level since June 2009. The yield on the equivalent German government bond rose to 3.218%, its highest level since 2011. Investors are responding to assessments that central banks will continue to tighten monetary policy by demanding a higher return in exchange for holding government debt. As of today, money markets are pricing in a probability of almost 85% that the European Central Bank (ECB) will raise interest rates at its next meeting.
The ongoing crisis in the Middle East pushed oil prices up by 6% last week, and the price of Brent crude oil continued to rise today. This comes as the USA and Iran struggle to bring the conflict to an end, and President Donald Trump has again threatened to bomb Oman if it "stands in his way" in his efforts to bring an end to the war.
The long-term financing costs of the US government have risen to their highest level since the financial crisis. The yield on 30-year bonds rose to 5.29%, the highest level since 2007 — the year the credit crisis that preceded the 2008 financial crisis broke out. The yield on Japan's 10-year government bonds rose to a three-decade high of 2.93% (the highest level since September 1996), as investors estimate that the Bank of Japan (BOJ) will need to raise interest rates as early as September in an attempt to support the yen.
"The ongoing weakness of the yen and inflation pressures reinforce the need for action, while uncertainty regarding how the government will finance the proposed tax cut on food adds another layer to fiscal concerns. Japan's bond market is clearly becoming less forgiving, and the Bank of Japan may soon need to choose between supporting a fragile economy and curbing inflation in the country," said Axel Rudolph, chief analyst at IG.
