DAILY SKETCH - Rise of bond yields is causing anxiety among central bankers

    • Daily sketch

In recent days, the central bankers of the Fed and the ECB have intensively commented on the increase in bond yields to maturity. They don't like the increase in bond yields very much. In particular, ECB officials stressed that in the event of further rise in yields, the ECB could intervene to ensure that the fragile economic recovery and financial conditions in the euro area are not jeopardized.

DAILY SKETCH - Rise of bond yields is causing anxiety among central bankers

In my opinion, central bankers would still like to see bond yields as low as possible. Although not publicly acknowledged by central bankers, record low bond yields, maintained at these minimum levels by massive quantitative easing, primarily serve the sustainability of record government debts.

At the same time, however, central bankers are significantly undermining investors’interests with their ultra-loose monetary policy, who have had to face so-called financial repression for a long time. This indicates the situation in global bond markets, where real inflation-adjusted bond yields to maturity are negative. As a result of this state of global bond markets, the real value and purchasing power of the capital of investors invested in bonds paradoxically declines over time.

Therefore, investors must increasingly focus on riskier bond segments, especially corporate bonds with a non-investment speculative rating (high-yield), in order to achieve the yield targets of their investment portfolios. At the same time, however, they accept a correspondingly higher investment risk.

Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.


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