The Federal Reserve embarked on an easing cycle, despite unprecedented fiscal deficits, a solid labour market, and core inflation settling well above target. As a result, it made sense to hold the view that Fed rate cuts would simply steepen the yield curve. The term premium has shifted higher. A continued easing cycle would push long-bond yields even higher, worsening the fiscal position of the Treasury.
The public finances of the UK are even more exposed to higher real yields because labour productivity has been so much weaker than in the US. The slide in the pound, alongside the jump in UK government borrowing costs, may force the Chancellor to backtrack in March, to stem the rise in gilt yields. A much tighter fiscal policy may be required to placate the bond market.
Underpinning all of this, is of course the JGB market. The cash earnings numbers out earlier today from Japan showed base pay was up 2.7% y/y in November. The BoJ is growing increasingly confident that, given structural labour shortages and the minimum wage hike, the economy is converging to a path of structurally higher nominal wage growth, helping to push JGB yields up to fresh highs.
