Authored by Jim Reid, Deutsche Bank global head of macro research,
The latest global bond sell-off has revived the idea that markets are fretting over unsustainable public finances. As concerned as I am by this issue in the longer term, the recent bond market weakness at the moment should be seen more as a continuation of the long normalisation from the historic anomaly of the 2010s.
That was a decade of financial repression with central banks buying trillions in government debt, benchmark policy rates sitting near zero, and sovereign borrowing costs held down for years. Had you been on a desert island for a couple of decades, the level of yields today would look perfectly normal at the end of your sabbatical from the world, not at crisis levels.
At Deutsche Bank, our house view has consistently been in recent years that yields would rise due to heavy government issuance, the retreat of quantitative easing programmes of bond buying by central banks and inflation levels that have been persistently higher and more volatile than the pre-pandemic period. In the US, inflation has now been above the Federal Reserve’s 2 per cent target for more than five years.
There is also some positive news that has supported higher yields. Global growth has held up better than most expected since the conflict with Iran began. US nominal GDP growth in the second quarter was 6.6 per cent year on year, which, outside the Covid-19 bounceback period, was the highest level since 2005. Clearly, part of this reflects
