Bond yields soar to new highs in more than a decade

Investors’ forecasts for the new round of central bank meetings are evident with the highs reached today by interest on debt on both sides of the Atlantic. Analysts are still trying to put a ceiling on the expected escalation in rate hikes.

The Federal Reserve of the United States monopolizes the biggest focuses. One day before his decision is known, the required return on the ten-year US bond, which evolves inversely to its price, breaks the 3.5% barrier for the first time in more than a decade, since November of the year 2011.

The trickle of sales continues as the moment of truth approaches, in which the Fed will announce tomorrow if it chains a third consecutive rise of 75 basis points in interest rates or if it chooses this time to accelerate the rate of adjustment at 100 basis points.

The markets give 80% probability to a rally of 75 points, and 20% to 100 points. But today’s news from Sweden keeps the debate open about what the Fed’s next step will be. This morning the Swedish central bank surprised with a rate hike of 100 basis points, above the expected 75 points.

Investors fear that this precedent will be repeated tomorrow with the Fed, which could assume the argument with which the Riskbank has justified the aggressiveness of its measure: “by raising rates more now, the risk of high inflation in the long term is reduced and thus the need for further monetary policy tightening in the future.”

Europe

In Sweden, inflation reached 9% in August. In the US, the CPI registers a slightly lower level, 8.3%, and in the eurozone it is even one tenth above the Swedish, reaching 9.1%.

Riskbank’s argument could also permeate the European Central Bank, which faces, like the Swedish central bank, the risk of recession. Caution in the face of a possible acceleration in the pace of rate hikes in the eurozone is behind the new sales recorded by European public debt.

The German bund, a benchmark in Europe, exceeds its summer highs by touching the 1.90% level.

This upward trend in the interest required on European fixed income breaks a particularly significant barrier in the case of Spanish debt. The sales deflate the price and for the first time in three months raise the profitability of the ten-year Spanish bond above 3%. The risk premium is around 110 basis points.

The current week raises even more the doses of tension in the Italian debt. The proximity of the new elections in Italy, called for this Sunday, brings out the resurgence of political uncertainty, and accentuates the sales by investors with a less tolerant risk profile. The interest required on the ten-year Italian bond exceeds 4.10%, its highest levels in three months, and the risk premium reaches 225 basis points, double that of Spain.

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