Globally, there is a concerted need to get the public finances in order, to put a stop to this bond rout. The recent deficit targets announced by France & Italy, underscore the complacency that is becoming pervasive across Finance Ministries, even in the Eurozone. The latest moves in global government bonds are reflective of very deep problems, the likes of which we have not seen in decades.
TIPS yields have now surpassed 2.5%, for both 5 & 30-years (hitting 2.59% and 2.51% yesterday, respectively). The 10-year TIPS yield sits just shy of this level, at 2.45%. In truth, it is hard to know the fair value for a 10-year Treasury note. It depends on what happens to US deficit spending and whether governments globally are willing to get control of the public finances. There is very little to indicate, currently, that governments are willing to take the tough decisions required get public spending down.
A further jump in long-dated real yields from here is undoubtedly a risk for economic growth. Still, even ‘if something breaks’, the old playbooks may not be so useful. Long-dated Treasuries may fail to act as a suitable hedge for equities, in an environment of growing fiscal largesse. For bonds to re-enter a bull market, there will need to be a sea-change in fiscal policies, globally, including in Japan. Again, there is no sign that Prime Minister Kishida is willing to tighten fiscal policy: on the contrary, his cabinet is readying another stimulus package.
