The rise in US Treasury yields is relentless. The 30-year inflation-indexed yield jumped to 2.33% yesterday. Globally, there is intense selling pressure on long-dated government bonds. It is much harder to make the case, that in Germany and Italy, real yields are rising because of improving growth prospects. The recent anti-subsidy probe has exposed the competitive concerns within European manufacturing, notably for autos.
The jump in Italian government bond yields is, in part, a reflection of ongoing loose fiscal policies. The Italian government has raised its deficit target for 2024 from 3.7% set in April, to 4.1-4.3% of GDP. This year’s deficit is projected to overshoot to around 5.5%, compared to the target of 4.5%. The most heavily indebted countries are not pursuing fiscal consolidation.
Indeed, the Japanese prime minister has asked his cabinet to compile a fresh economic package by the end of October, deploying “all possible tools” necessary. With his approval ratings sliding, the prime minister is getting bolder – and more reckless.
The y/y for the weighted median CPI accelerated sharply in August. Reflationary impulses are evident throughout the services sector, even for items that have historically been resistant to price increases. Put simply: Japanese monetary policy is out of kilter with the inflation data. The BoJ cannot hold its current policy stance much longer. The Japanese current account surplus hit a record Y2.767tr in July. A tectonic shift in monetary policy, inducing yen repatriation, could give another jolt to long-dated government bonds.
