This week, events in the bond markets dominated the headlines. As investors continued to adopt a “higher for longer” narrative for interest rates, long-dated government bond yields around the globe increased.
On Wednesday in the US, 30-year Treasury bond yields rose to 5% for the first time in 16 years, whilst in Germany the 10-year bund hit 3% for the first time since 2011. Closer to home, UK government bonds (known as gilts) followed the same trend, with 30-year bonds reaching a 20-year high of 5% as prices fell. The sell-off in the bond market follows a series of US economic data points, which have led investors to conclude that the Federal Reserve will keep monetary policy tighter for longer to bring down inflation.
Whilst painful for most asset classes in the short run, it could be that the latest increase in the cost of debt tightens financial conditions enough to plant the seeds for a slowdown in economic growth and perhaps mark the final chapter of this tightening cycle. The rise (hopefully moderate) in unemployment would reduce demand and likely see inflation fall, giving central banks the opportunity to moderate monetary policy and set the stage for a more conducive environment for equities and bonds in the medium term.
In the next few weeks, attention will likely turn away from the macro environment and instead focus on individual companies. US earnings season kicks off with the banks on Friday 13th October, and in the 3 weeks that follow, most of the world’s largest businesses will be updating their shareholders. Despite concerns about inflation and rising interest rates, the US consumer has so far proved resilient. With a decent amount of the personal savings that were built up through COVID having now been depleted, investors will be keen to see if businesses have been able to continue to grow earnings.
John Naylor, Chartered FCSI – Head of Investment Committee