Expansionary fiscal policies in Germany and the United States, as well as the prospect of greater government spending in Japan, have pushed long-dated yields higher in global fixed-income markets—a marked contrast to the bullish sentiment in equity markets.
Still, even as long-dated yields have risen, the MOVE index, which provides real-time information on interest rate volatility, has remained tame, which is another example of investor complacency.
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Government debt issuance, though, is set to increase later this year as advanced economies seek to fund expansionary fiscal policies.
These broader trends suggest that the MOVE index will eventually increase in a reflection of rising policy uncertainty, increasing interest rate risk and, possibly, greater economic stress.
A host of factors are driving interest rates and inflation higher around the world:
- Increased government spending to accommodate aging populations.
- Tax cuts in the United States.
- The release of the German debt brake to fund additional military spending.
In addition, investors are concerned about the direction of Japanese bond issuance and who will purchase those notes. Already, the Bank of Japan owns 52% of the outstanding Japanese bonds.
While not on the radar of most investors, Japanese bond issuance and the Bank of Japan’s bond purchases have been an anchor of global yields over the past few decades.
Should the upcoming Japanese election result in increased government spending, the idea of who will purchase that debt will most likely push yields higher in Japan and elsewhere.
It’s part of the global regime change in fixed income prices, interest rates and monetary policy, which is the foundation of our U.S. and global economic outlook.
