Global bond markets are entering another crucial week as investors weigh fresh inflation figures, central-bank decisions and mounting concerns over government borrowing costs from Tokyo to New York.
Bond yields have climbed sharply across major economies, lifting the cost of finance for governments, companies and households while putting pressure on elevated stock-market valuations. The rise has been fuelled by higher energy prices linked to the conflict in the Middle East, renewed inflation fears and anxiety over the scale of future sovereign borrowing.
Japan is likely to remain at the centre of the market’s attention after the yield on its 10-year government bond moved above 3 per cent for the first time in three decades. Investors are watching for signs that Japan’s huge pension fund, the GPIF, could redirect money towards domestic bonds and away from overseas debt and equities.
Such a shift could have international consequences, given the scale of Japanese investment in US, European and Australian markets. The yen has already strengthened significantly, gaining almost 3 per cent over Wednesday and Thursday as traders increased their expectations of faster interest-rate rises from the Bank of Japan.
In the United States, producer-price figures on Thursday will be followed by the consumer-price index on Friday. Economists surveyed by Reuters expect consumer prices to have risen by 0.4 per cent in August, data that could influence whether the Federal Reserve raises interest rates at its September 15 and 16 meeting.
Markets have moved towards pricing a possible rate increase after Federal Reserve chair Kevin Warsh adopted a hawkish tone at the Jackson Hole conference. But Governor Christopher Waller said this week that he would favour leaving rates unchanged if forthcoming figures confirm that inflationary pressures are easing.
European Central Bank decision under scrutiny
The European Central Bank is widely expected to raise interest rates by a further quarter of a percentage point on Thursday, repeating the move made in June. With inflation back above 3 per cent as energy costs rise, investors will be looking for clues about whether further increases are likely later this year.
Financial markets are currently pricing in another move by December and one more next year, although economists believe the ECB may pause after Thursday’s decision. Higher bond yields may already be doing some of the work normally achieved through tighter monetary policy.
Oracle’s quarterly results will also be watched for signs of whether enthusiasm for artificial-intelligence companies can withstand the rise in borrowing costs and renewed scrutiny of technology valuations.
Debt pressures are also intensifying in Senegal, where the authorities have agreed a staff-level deal with the International Monetary Fund for a proposed 36-month programme worth about 2.2 billion US dollars. The agreement still requires approval from the IMF’s management and executive board, as well as financing assurances from international partners.
The IMF said Senegal intended to seek debt treatment as part of efforts to restore long-term sustainability. The country’s government has been grappling with more than 10 billion dollars of previously undisclosed debt, and the terms of any restructuring could become clearer as the IMF and World Bank review their framework for assessing debt in low-income countries.
Senegal’s preference to exclude locally issued debt held by regional banks and multilateral institutions could leave international bondholders facing a larger share of any losses. A final resolution is expected to take months, but the coming week may provide an important indication of how the restructuring process will develop.
