Meanwhile, the changes in global bond markets, which have happened in the last several months, are truly dramatic. Let’s take a quick look at recent developments. Back in September, the Fed started to cut the federal funds rate and pushed it from 5.5% to 4.5%. Meanwhile, the yield of 10-year Treasuries increased from 3.6% to 4.75%!
A similar situation was seen in the UK. The Bank of England has cut the interest rate from 5.25% to 4.75%, while the yield of 10-year UK government bonds increased from 3.75% in early August to 4.80%. The yield of these bonds has not been at such levels since 2008! What’s going on and how will these developments impact other assets?
Usually, government bond yields have direct correlation with interest rates set by central banks. It should be noted that markets are forward-looking, so bonds often move ahead of interest rates as investors and traders try to front-run central bank policy.
However, the current case is rather unusual. Central banks have cut rates several times this year, while bond yields have stubbornly moved higher. Such moves indicate that markets either do not believe in the official central bank policy outlook and assume that banks will be forced to raise rates in the near future or worry about governments’ ability to repay debts.
At this point, there’s a reason to believe that markets worry that developed countries have lost the ability to conduct responsible budget and fiscal policy. As a result, they may have trouble managing their debt, which has significantly increased since the global financial crisis.
A sharp move in bond yields in the opposite direction to the trajectory of central bank interest rates signals a major crisis of confidence. Investors demand a higher premium to lend money to the U.S., UK, and other developed countries.
Traditionally, rising bond yields were viewed as a negative catalyst for non-yielding assets, such as Bitcoin or gold. Today, we see a different picture: both Bitcoin and gold are trading well above the levels seen in early fall, when government bond yields have started to move higher.
The crisis of confidence pushes investors to seek safe-haven assets whose value does not depend on government policies, fueling demand for Bitcoin and gold. Meanwhile, this crisis makes the debt problem even worse, which leads to even more demand for assets that are independent from government actions.
Currently, the yields of UK and U.S. 10-year bonds have stabilized below the psychologically important 5% level. In case yields move above this important level, Bitcoin and gold will likely enjoy a wave of “panic buying” by investors fleeing government debt. While central banks will surely try to stop the panic, they do not have many options left in case investors lose confidence in governments’ ability to manage debt.