Global government debt: little headwind from central bankers
Markus Allenspach, Head Fixed Income Research, Julius Baer
Government bond yields rose globally, driven rather by central banker comments than economic figures. Mario Draghi, President of the European Central Bank, used the platform of the ECB’s forum in Sintra, Portugal, to praise the progress he has achieved towards full employment and reflation. Confounding market expectations that he would argue for a prolongation of the ECB’s asset purchase programme, Draghi literally argued for a reduction of monetary stimulus.
As a matter of fact, Draghi outlined why inflation will pick up in the Euro zone in the medium term and that he has to reduce his support accordingly. As a reaction to this statement, the yields on the 10-year German, French, Italian and Spanish government bond yields rose between 0.13 per cent and 0.17 per cent.
The 10-year benchmark German 0.25 per cent Bund 2027 lost more than 1 per cent in value, which equals 4 years’ worth of coupon income. The ECB warned that holding low-yielding debt delivers less return than risk in its latest financial stability report. US government bonds were also rising, lifted not only by the comments of Draghi but also the very upbeat assessment of the US economy delivered by former Fed President Ben Bernanke at the Sintra Forum.
At the same time, current Fed Chair Janet Yellen warned in London that “asset prices are somewhat rich”. The yield on the benchmark 10- year Treasury note is back above the 2.2 per cent level again.