2023-10-06 20:01:45
Not so long ago, families, businesses and governments effectively lived in a world of free money.
The US Federal Reserve’s benchmark interest rate was zero, while central banks in Europe and Asia even applied negative rates to stimulate economic growth after the financial crisis and during the pandemic.
Those days now appear to be over and everything from housing to mergers and acquisitions is being disrupted, especially after yields on 30-year US Treasury bonds this week hit 5% for the first time since 2007.
The importance of Treasury bonds helps explain why the change in the bond market is important for the real world. As the risk-free base rate, all other investments are benchmarked against it, and as the Treasury yield rises, so this ripples through the wider markets, affecting everything from car loans to overdrafts, public loans and the cost of financing a corporate acquisition.
And there’s a lot of debt out there: according to the Institute of International Finance, a record $307 billion was outstanding in the first half of 2023.
There are many reasons for the dramatic change in the bond market, but three stand out.
Economies, especially those of the US, turned out to be more robust than expected. This, along with previous doses of easy money, is keeping the fire burning under inflation, forcing central banks to raise rates higher than previously thought and, more recently, to stress that they will leave them there for some time. As fears of a recession have receded, the idea that policymakers will have to quickly reverse course – the so-called pivot – is rapidly losing traction.
Finally, governments issued much more debt — at low rates — during the pandemic to safeguard their economies. Now they have to refinance it at a much more expensive price, sowing concerns about unsustainable fiscal deficits. Political dysfunction and credit rating downgrades contributed to worsening the problems.
Put all this together and the price of money will have to rise. And this new higher level portends major changes in the financial system and the global economies it powers. Some money market funds and even bank deposits now offer a 5% margin. Germany’s 10-year yield is at its highest since 2011, while even Japan’s is at a level not seen in a decade.
Higher rates mean countries have to pay more to borrow. In some cases, much more. And that will continue to rise as long as rates remain high. In turn, governments may have to borrow even more or choose to spend less money on other expenses.
More and more developing countries are finding it difficult to service their debt, being forced to reduce essential development expenses. Ultimately, as governments attempt to control the fiscal situation, the burden of adjustment measures, such as increasing interest rates and controlling inflation, falls on the most disadvantaged families and populations.
By: Economic Editor
Angola Portal
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