US reflex betting is unwanted in global market

(Bloomberg) – The turmoil in the United States bond market causes goosebumps in indebted countries that for years have paid less to borrow more.

As the American economy recovers, yields on government bonds from Australia to Italy follow the upward trend in yields in the USA. These higher costs threaten to undermine the fragile recovery in Europe, which has failed to control the pandemic and has had to tighten up Covid-related restrictions. Higher costs are also unwelcome in emerging markets, which depend on dollar financing.

“It is something that investors are looking at,” said Thomas Wacker, responsible for credit at UBS Global Wealth Management. “Any increase in interest rate costs reduces countries’ fiscal margins and increases future deficits, when they could spend on investments and reforms. Debt sustainability is a valid concern. ”

G-7 public debt yields have more than doubled since the beginning of the year, after rising 27 basis points, to 0.48%, according to data from the Bloomberg Barclays index, in line with the acceleration of the yields of Treasuries.

While it is difficult to determine how much of this is due to what is happening in the US Treasury bond market, ING analysts point to the US as a driving force and even claim that no reflective strategy would be happening in Europe in a world that was isolated from the USA.

Regardless of whether they can blame the strong stimulus economic policy in the United States, rising government debt prices have become a headache for officials and investors.

In an interview with Bloomberg Television last week, European Central Bank President Christine Lagarde said that monetary authorities will not be shy about using all powers to prevent bond yields from rising. The ECB accelerated bond purchases to curb rising financing costs.

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For now, financing conditions in the euro region are still low compared to the costs of existing debt. Italian 10-year bonds sold with a 4.75% coupon for nearly a decade are likely to be refinanced at a much lower rate, given their current yield of 0.631%.

On the other side of the Atlantic, there is even less cause for concern, at least this year. Interest payments on the national debt fell last year and are expected to continue to fall, even after all pandemic spending and amid higher financing costs for 10 years in a year.

But a period of tightening spending in the long run could hamper the economic recovery and, as a consequence, demand more stimulus from central banks, according to Mark Nash, asset manager at Jupiter Investment Management.

“The market will have to seek austerity in the future,” said Nash. “There is too much debt. The recovery is masking that so far, but the weaknesses for the markets are growing. ”

Emerging

Nash says the danger is in the developing world, which is already feeling the impact of higher dollar financing costs. An emerging market benchmark stock indicator reduced earnings to just 3.4% for the year amid concerns that poorer nations will lag behind in vaccination efforts and stimulate economies.

Emerging market countries owe more than $ 4 trillion in dollar-denominated debt, according to estimates from the Bank for International Settlements. The burden grows with rising US yields, with the potential for your debt problems to spread to other markets, according to Nash.

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