It’s time to talk about government bond yields — please, contain your excitement!
Driving the news: Long-term federal borrowing costs hit multi-decade highs earlier this week across several major economies as investors grow increasingly concerned about inflation that just won’t seem to go away and mounting government deficits. Yesterday, the U.S. was forced to more than double the size of debt buybacks to drive bond yields down.
As a quick reminder, bonds are a financial instrument governments use to raise money from investors, promising yields (returns plus interest) after a fixed period.
On Tuesday, U.S. 30-year bonds touched their highest level since 2007, while U.K. 30-year bonds reached 1998 levels. In Japan, they neared their highest level ever.
Why it’s happening: A maelstrom of factors have weighed on government bonds this year. Firstly, the never-ending war in Iran has reignited fears about inflation, which devalues bonds. Secondly, investors are capped out after shovelling cash into tech companies for AI projects. And thirdly, governments already owe a lot, and investors are hesitant to lend more.
In Canada: These same pressures have led to a rise in Canadian bond yields. While they’re not as high as in many other places, as our debt load isn’t as heavy and inflation is relatively subdued, they’re still hovering around levels last seen in 2009. And after this week’s hotter-than-expected inflation report, they could climb further.
Why it matters: Bond sell-offs have numerous economic ripple effects, like higher borrowing costs for governments that make deficit spending more expensive. Perhaps the one most immediately felt by Canadians, however, will be the upward pressure this will exert on mortgage rates, which are anchored to bond yields.—QH
