Breakingviews - Central banks will have to fight reflation tantrum

A trader looks at screens as he works on the floor at the New York Stock Exchange (NYSE) in New York, U.S., August 13, 2019.

LONDON (Reuters Breakingviews) - Central bankers will get their wish for a sharp rebound in growth this year. They may, however, be less happy with how that affects fixed-income markets. Inaction may not be an option.

Improving economic prospects have boosted global government bond yields. Those on 10-year U.S. debt jumped on Thursday to a one-year high of 1.614%. Comparable German bonds yielded as much as minus-0.203%, the most since March 2020, at one point on Friday. Since higher benchmark yields lift borrowing costs across the economy, further increases could undermine policymakers’ efforts to support a recovery from the slump induced by Covid-19.

For now, rate-setters are taking a measured approach. European Central Bank Chief Economist Philip Lane said on Friday that excessive rises in yields would be inconsistent with fighting the shock of the pandemic but he also made clear the ECB wasn’t trying to keep yields at any particular level. The presidents of the Kansas City and Atlanta Feds also appeared relatively relaxed on Thursday about market moves. One reason is that yields are still comparatively low. Moreover, the absolute rise in yields in the past four months is comparable to the similar “taper tantrum” period in 2013 after then-Federal Reserve Chair Ben Bernanke said the pace of bond purchases might slow.

However, in relative terms, the moves this time round are more dramatic because the starting points were so low. The U.S. 10-year yield has nearly doubled in the past four months. It rose by less than half over the same timeframe after Bernanke’s 2013 comments. There’s also more scope now for such moves to turn into a vicious cycle since low yields left investors reliant on capital gains to make money.

The Reserve Bank of Australia’s experience shows words alone might not be enough. The central bank’s unscheduled offer on Friday to buy government bonds had a limited impact on domestic markets. Unlike their Australian peer, Fed Chair Jerome Powell and ECB boss Christine Lagarde aren’t targeting specific yield levels for a specific bond maturity. And they have more firepower to ramp up asset purchases if needed. Debt markets may force them to do just that.


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