Loans to overdrafts: US bond yield at 5% means pain heading everyone's way

The US Federal Reserve's benchmark interest rate was 0, while central banks in Europe and Asia even ran negative rates to stimulate economic growth after the financial crisis and through the pandemic

Not so long ago, families, businesses and governments were effectively living in a world of free money.
 

The US Federal Reserve’s benchmark interest rate was zero, while central banks in Europe and Asia even ran negative rates

to stimulate economic growth after the financial crisis and through the pandemic. Those days now look to be over and

everything from housing to mergers and acquisitions are being upended, especially after 30-year US Treasury bond yields this

week punched through 5 per cent for the first time since 2007.
 

“I struggle to see how the recent yield moves don’t increase the risk of an accident somewhere in the financial system given the relatively abrupt end over recent quarters of a near decade and a half where the authorities did everything they could to control yields,” said Jim Reid, a strategist at Deutsche Bank AG. “So, risky times.”

The importance of Treasuries helps to explain why the bond-market move matters to the real world. As the basic risk-

free rate, all other investments are benchmarked against them, and as the Treasury yield rises, so that ripples out to broader

markets, affecting from everything from car loans to overdrafts to public borrowing and the cost of funding a corporate take-

over. And there’s a lot of debt out there:

According to the Institute of International Finance, a record $307 trillion was outstanding in the first half of 2023. There are lots of reasons for the dramatic bond-market shift, but three standout. Economies, especially the US, have proved more robust than anticipated.
 

That, along with the previous dollops of easy money, is keeping the fire lit under inflation, forcing central banks to jack up rates higher than once thought and, more recently, stress that they’ll leave them there for a while. As recession fears have ebbed, the idea that policy makers will have to quickly reverse course – the so-called pivot – is fast losing traction.

Finally, governments issued a lot more debt — at low rates — during the pandemic to safeguard their economies. Now they have to refinance that at a much costlier price, sowing concerns about unsustainable fiscal deficits. Political dysfunction and credit rating downgrades have added to the headwinds.
 

Put all these together and the price of money has to go up. And this new, higher level portends major changes across the

financial system and the economies it feeds. Some money-market funds and even bank deposits are now offering a 5% handle. The German 10-year yield is at the highest since 2011, while even Japan’s is at a level not seen in a decade.

Emerging markets’ $266 bn dip hits what’s left of the bull market 

Emerging-market investors hoping for a fourth quarter rebound have faced a selloff erasing most of the remaining case for staying upbeat this week, with fresh causes for concern arising from North Africa to Latin America. About $266 billion shareholder wealth was erased even though the biggest emerging economy — China — was closed for holidays. A gauge of returns from carry trades in 18 developing-nation currencies showed the worst losses since China ended its Covid Zero policy. The global bond slump hit poorer nations hard — sending the average sovereign borrowing costs soaring to highs seen during the pandemic. At this rate, this could be the first time since 2015 that carry traders make losses for three successive quarters.