Bond market sends growth warning to hawkish central banks – News Couple
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Bond market sends growth warning to hawkish central banks


(Bloomberg) — The old gauge of bond market growth sends an ominous warning as the world’s central banks are close to raising interest rates from record lows.

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Traders are betting on an interest rate hike of up to 161 basis points over the next year in countries such as the UK, New Zealand and South Korea amid rising costs of living and commodity prices. However, the flattening of yield curves – which has historically been seen as the market assessment of economic health – indicates growing concern that such a rapid withdrawal of support would hurt the nascent recovery.

Such an opinion is not without its critics. Yield curve signals have been distorted by more than a decade of central bank bond buying. But with these metrics aligned with other growth indicators and talk of stagflation sweeping Wall Street, investors are considering whether such a rapid pace of tightening – if implemented – could be a costly mistake.

“The negative surprise to growth will probably outpace the upward trend in inflation,” said Ibrahim Rahbari, global head of G10 foreign exchange strategy at Citigroup Inc. A hardliner for a while only to have to loosen up maybe in a year or so again.”

currency weakening

This concern is particularly acute in the UK, where traders are pricing in more than 100 basis points of Bank of England tightening by the end of 2022 – the most aggressive cycle of this century. That’s even as the nation grapples with the harsh economic effects of Brexit and a resurgence of winter Covid-19 cases.

Growth concerns weighed on the pound, which fell to its lowest levels this year at the end of September. While it has since recovered, traders are struggling to figure out what higher interest rates might mean for growth – and the British pound.

High rates also failed to boost the South Korean won, which is among the worst performing in Asia over the past six months. It is a similar story for the New Zealand dollar, which fell after the Reserve Bank of New Zealand raised interest rates last month; While it has since regained some of its gains, expectations for the New Zealander have steadily fallen as markets price the central bank’s path to neutrality.

“Most central banks in other developed markets have not started the process of normalization – let alone pricing in an expected monetary rate path to neutral,” said Prashant Nyonya, strategist at TD Securities in Singapore. “With the possibility that other central banks will play catch-up in raising interest rates, the rise of the New Zealand dollar must be brought to an end.”

This trend is also present in emerging markets, where currencies have fallen to the weakest level since March 2020 compared to average domestic bond yields. It suggests that investors are dismissing the allure of higher interest rates, fearing instead the toxic combination of slower global growth and faster inflation.

pull growth

However, the world is not exactly on the brink of a new recession. Leading indicators of the Organization for Economic Co-operation and Development point to moderating growth in the US, the eurozone and the UK, influenced in part by “the continued rise in consumer prices in recent months, driven by higher energy prices,” according to an October 12 release.

The reliability of yield curves as an indicator of economic health has been called into question amid massive central bank bond buying and pandemic spending programs, which have turned traditional models on their head.

“I would be careful to over-interpret what the curves are trying to tell us because there’s a lot going on,” said Arend Kapteyn, chief economist at UBS Group AG.

But the question of whether economies were strong enough to withstand high borrowing costs left markets stumbling nonetheless. That fuels debate over whether price pressures are really temporary, or whether inflation will fall below central bank targets if energy costs ease and supply chain problems resolve. Such a reversal could push an early end to raising prices just as easily as it hurts growth.

said Kei Yamazaki, senior fund manager at Sumitomo Mitsui DS Asset Management Co. In Tokyo: “I have the impression that central banks are getting ahead of themselves.” “The market is sending signals that a rate hike is still too early.”

(The price hike rates are updated in the second paragraph.)

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