It has been a tough week for US treasury bonds after a gentle decrease in prices became a rush. With government bond yields dropping to low levels, investor returns for insurers and pension funds have been wiped out.
Inflation worries pushing bond yields down
Growing inflation concerns have been pushing Treasuries down for almost a month now. As a result, yields have risen to the highest point since the start of the pandemic. On Thursday last week, the US government debt auction led to a 1.61% spike in ten-year yields to end the day at 0.14%.
Steven Major, the bond research head at HSBC said that investors are currently eating a humble pie with bond markets serving up a humility lesson. Major stated that the lower bond yields probability has dropped due to a lot of fiscal stimuli to cushion the economy. Besides the fiscal stimulus, the below zero interest rates by central banks of various countries to spur economic recovery from the COVID-19 pandemic have been pushing government bond yields to low levels.
Nevertheless, bonds are still strong in historical terms. But for the steady and staid government debt market, the movement scale is sporadic. The current situation has renewed the chaotic scenes memories in Treasuries witnesses almost a year ago, leading to investors’ concerns regarding whether there will be lasting bond yields rise. There is a paradigm shift currently, and what is worrying is history is not offering any guides for now.
Warren Buffett warns that bond returns could encourage risk investment behavior
Interestingly, Warren Buffett has warned that the current “pathetic” returns for bonds could encourage risky behavior. In his annual letter to Berkshire Hathaway shareholders, the legendary investor said that bonds are not the place nowadays.
In recent weeks, US government debt yields rose considerably, which is an indication that investors are optimistic of a robust economic recovery thanks to stimulus measures and vaccinations in the US. However, bond yields are at historic lows and what happens in the market is subject to discussion. Buffett used his decades of experience in the bonds market to state that there is much risk associated with low yields. He warns that risky loans are not a solution to inadequate interest rates.
ECB should react to unwarranted bond yields rise
In Europe, policymaker Francois Villeroy de Galhau has indicated that the European Central Bank (ECB) should react to any unnecessary bond yields rise that threatens to undermine the bloc’s economy. The comments encourage investors to bet that ECB is stepping up the emergency bond purchase program. Fresh data shows that net purchases lagged this past week, but the numbers were distorted by redemptions. In Italy, the ten-year debt yield dropped ten basis points to 0.66%, which is the largest decline since June.
Currently, the global selloff of long-term government bonds is pushing up yields. This is concerning for the eurozone since lenders use sovereign debt returns as a reference point for loans to households and companies.