Government bond yields are accelerating their rise in August around the world. This is bad news for the investor who is already inside, with a fixed income portfolio, because asset prices fall as happened in 2022 for most conservative funds. They are good for those who are thinking of investing now because they will access higher returns. And they are very bad for those who issue debt, which entails higher financial costs if they have to refinance, as happens, for example, with variable rate mortgages.
One of the largest issuers is the Public Treasury, which carries the bulk of the 1.56 trillion euros of state public debt in Spain. The average rate of its outstanding balance crossed the 2% barrier in July and will continue to rise month after month as it continues to go on the market to refinance current debt and issue new ones.
The cost of servicing that debt will be close to 40,000 million euros per year in interest alone at the start of 2024, according to financial estimates. The focus now is on the long term since it marks the real sustainability of its borrowing capacity. The interest on the 10-year bond closed this Thursday at 3.76%, its highest level since March. It is also the ceiling so far in 2023.
If it exceeds it this Friday, the profitability and cost of issuing at that term would mark the highest since 2014, shortly before the European Central Bank (ECB) launched the debt purchase program (APP) that curiously ended last month. The trend towards an increase in financial risk has sharpened this month after the downgrade of the US rating and the warnings to the financial sector.
But experts point out that the better-than-expected progress in the main economies is what is causing an increase in interest on long-term debt -and the fall in prices- given the possibility of new rate hikes, as pointed out by the Wednesday the Fed, or its maintenance at restrictive levels.
US 10-year bond interest has rallied above 4.4% this week, a level not seen since 2007. “Where does this leave us? It leaves us in a bear market [precios] reactivated in the main bond markets. But it is mild, however, so far. The bond market was really bearish last year when the Fed started raising rates and market rates rose significantly,” says Padhraic Garvey, economist at ING Research.
Large institutional investors have cut their positions in public debt in recent months in the face of plans to reduce their balances from central banks and also until they see when they stop raising rates. Only the European Central Bank (ECB) is reducing its portfolio by 15,000 million euros a month as new issues do not arise, but the possibility that it will sell part of its portfolio later increases the tension in the debt price. The Spanish yield curve presents a mixed aspect with the 10-year bond at 3.76% but with the 15, 30 and 50-year bonds already yielding above 4%. Short-term bills (3, 6 and 12 months) moved between 3.6% and 3.7% until Thursday.
The Bloomberg index that measures total returns on global sovereign debt rose as much as 3.3% this week, reaching its highest level since August 2008. Sovereign bonds around the world have generated a 1.2% loss for investors, making them the worst performer among Bloomberg’s major debt indices.
“This change marks a trend reversal from the start of the year, when optimism about the eventual cessation of rate hikes led to a rise in global bonds,” Bloomberg reports in an analysis.
According to his data, investors are showing interest in higher yields in the United States. During this year, investors have settled from America.
Fund managers reached their long positions in Treasury bond futures to record levels in the week ending Aug. 8, according to Commodity Futures Trading Commission data compiled by Bloomberg. Additionally, a client survey conducted by JPMorgan Chase & Co. revealed that long positions in the week ending August 14 matched the high set in 2019, which was the highest point since the financial crisis.
