Bond markets shaken by recession concerns

By Muhammed Said Tanil

ISTANBUL (AA) – As geopolitical risks stemming from the Russia-Ukraine war, the Federal Reserve's hawkish stance, and expectations that inflationary pressure will continue accelerated the outflows from the bond markets in April, analysts said the activity will continue throughout the next month and these developments may keep the agenda busy.

The opening of the money taps worldwide and the problems in the supply chains due to the COVID-19 pandemic brought inflation to record high levels in many countries.

The activity started in markets after the Fed initiated a tight monetary policy process as part of the fight against inflation and signaled that it would not hesitate to raise interest rates if necessary.

With this development, bond prices fell sharply around the world, while yields increased rapidly.

The US 10-year bond yield carried its upward movement to the fifth consecutive month and reached its highest level since December 2018 with 2.98% in April.

Likewise, Germany's 10-year bond yield climbed to 0.982%, the highest level since July 2015, while France's 10-year bond yield climbed to 1.45%, the highest level since December 2018.

- Yield curve flat again

At the beginning of April in the US, the two-year bond yields exceeded the 10-year bond yields, causing recession concerns to be discussed loudly.

Towards the end of the month, with the increasing gap between short-term and long-term bond rates, the yield curve turned flat again.

Analysts stated that backward-bending yield curves in some bonds could be a signal for a recession in the US economy, recalling that every time the difference between the US 10-year bond rate and the two-year bond rate turned negative in the last 70 years, there was a recession in the US.

As of January, the US three-month bond yield increased approximately by 84 basis points, two-year bond yields by 206 basis points, three-year bond yields by 202 basis points, five-year bond yields by 179 basis points, 10-year bond yields by 146 basis points, and 30-year bond yields by 113 basis points.

- US economy contracts 1.4% year-on-year in 1st quarter

While increasing bond interests caused costs to rise in almost all areas of the economy, from government borrowing to housing loans, this situation started to show itself in macroeconomic data.

According to the data released in the last week of April, the US economy surprisingly contracted by 1.4% in the first quarter, contrary to the annual growth expectations of 1.1%.

With these developments, it is predicted that the Fed will increase interest rates by 50 basis points at the meeting in May.

The possibility that the bank will increase interest rates by 75 basis points in the coming months is also on the table.

While the verbal guidance of Fed officials continued, St. Louis Fed President James Bullard stated that the Fed should keep inflation under control and said that it shouldn’t rule out rate increases of 75 basis points.

In its March meeting, the Fed decided to increase interest rates for the first time since 2018 and increased the policy rate to the range of 0.25-0.50.

The last interest rate hike by the bank was made in November 2018 in order to end the expansionary monetary policies that it put into effect after the global financial crisis.

The interest rate is expected to stand at 1.9% at the end of 2022 and 2.8% by the end 2023.

Enver Erkan, the chief economist in Tera Investment, told Anadolu Agency: “After the process that started with Fed Chairman Jerome Powell's bringing a series of 50 basis points to the agenda for May, expectations for a 75-basis-point hike appeared.”

He reminded that the interest rates are higher than at the end of last year in all maturities and said the risks and perspective differences between the European Central Bank and Bank of Japan's policies will keep the yield gap.

* Writing by Gokhan Ergocun​​​​​​​