“All eyes” were on the spike in Treasury yields this week, says Dave Shellock in the FT. The ten-year US government bond yield has climbed back above 3% (as the price has fallen) for the first time since November. At the beginning of 2009, it was yielding just over 2% – a major drop from 4% in August. Other government bonds have also slid: the German ten-year bund yield reached a two-month high over 3.4%.
Part of the story is that the Fed has indicated that it could start buying Treasuries, notes the FT’s Lex column. As a result the slide has been exacerbated by the fact that there have been no short-covering rallies. Then there is concern over how much supply is on the way and whether buyers will soak it up. As governments rack up debt in an attempt to boost their economies, global bond issuance is expected to treble to a record $3trn in 2009. The US will account for 66% of the sum. Linked to this is the emerging fear of inflation as the government borrows, spends and prints money in order to prop up the economy.
David Oakley in the FT points out that the yield on inflation-linked government bonds has fallen over the past few weeks. The bond boom may not be over yet, given that inflation is set to go negative and the force of deleveraging across the economy looks likely to overwhelm rescue efforts, as Capital Economics notes. But “at some point there will be inflationary traction” as the authorities up the ante, says John Mauldin on Investorsinsight.com, while bonds are still historically expensive. This is no time to start buying.