US reflation bet is not attractive in global market

(Bloomberg) – The turmoil in the US bond market is generating nervousness in indebted countries that for years have paid less to borrow more.

As the US economy progresses, Australian government bond yields to Italy follow the upward trajectory of the US Those higher costs threaten to undermine a marked recovery in Europe, which is losing control of the pandemic. and expanding the restrictions. They are also not welcome in emerging markets that rely on dollar funding.

“This is something investors are seeing,” said Thomas Wacker, chief credit officer at UBS Global Wealth Management. “Any increase in the cost of interest rates reduces the fiscal margin of countries and increases future deficits when they could have been used in investments and reforms. Debt sustainability is a valid concern ”.

Yields on G7 debt have more than doubled since the beginning of the year after rising 27 basis points to 0.48%, according to data from the Bloomberg Barclays Index, in line with the skyrocketing acceleration in Treasury yields. .

While it is difficult to determine how much of that is due to what is happening in the Treasury market, analysts at ING Groep NV point out that the US is the driver, and even say there would be no reflation strategy in Europe in a world in which it was isolated from the United States.

Regardless of whether they can blame US economic policy, the rising price of public debt has become a headache for authorities and investors.

In an interview with Bloomberg Television, the president of the European Central Bank, Christine Lagarde, said last week that the monetary authorities will not stop using all powers to prevent the increase in bond yields. The ECB accelerated bond purchases to curb rising borrowing costs.

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For now, financing conditions in the eurozone remain low compared to the costs of existing debt. Italian 10-year bonds sold at a 4.75% coupon nearly a decade ago are likely to be rolled over at a much lower rate given their current 0.631% yield.

On the other side of the Atlantic, there is even less cause for concern, at least this year. Interest payments on the national debt fell last year and would continue to fall, even after all the pandemic spending and amid the highest 10-year borrowing costs in a year.

But a long-term spending tightening period could hurt the economic recovery and therefore require more stimulus from central banks, according to Mark Nash, a resource manager at Jupiter Investment Management.

“The market will have to look for austerity going forward,” Nash said. “There is too much debt. The recovery is masking this so far, but the weaknesses for the markets are growing ”.


Nash says the danger is in the developing world, which is already feeling the impact of rising dollar borrowing costs. A benchmark gauge of emerging market stocks cut earnings to just 3.4% for the year, amid concerns that poorer nations will lag behind in vaccination and stimulus efforts for their economies.

Emerging market countries owe more than $ 4 trillion in dollar-denominated debt, according to estimates by the Bank for International Settlements. The burden increases as US yields rise, with the potential for its debt problems to spread to other markets, according to Nash.

Original Note: Made in USA Reflation Trade Is a Globally Unwanted Export (2)

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