June 19, 2024

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‘The bond vigilante is coming back,’ UBS strategist says

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The bond vigilantes are coming back as investors continue to sell amid the prospect of higher for longer interest rates and a growing fiscal deficit, according to Kevin Zhao, head of global sovereign and currency at UBS Asset Management.

The yield on the benchmark 10-year U.S. Treasury note rose above 5% once again on Monday, having passed the milestone on Thursday for the first time since 2007. Yields move inversely to prices.

The further selling came after Federal Reserve Chairman Jerome Powell vowed to remain resolute in keeping monetary policy tight as the central bank looks to return inflation sustainably to its 2% target, while investors are also pricing in surprising economic resilience alongside fiscal slippage.

The U.S. federal government ended its fiscal year in September with a fiscal deficit of almost $1.7 trillion, the Treasury Department announced on Friday, adding to a huge national debt totaling $33.6 trillion. The country’s debt has swelled by more than $10 trillion since the onset of the Covid-19 pandemic in the first quarter of 2020, prompting a deluge of fiscal stimulus to help prop up the economy.

Speaking to CNBC’s “Squawk Box Europe” on Friday, Zhao highlighted the historic bond market sell-off that greeted former British Prime Minister Liz Truss’ disastrous “mini-budget” last September — which included a raft of unfunded tax cuts — as an example of bond investors lashing out against what they deem to be irresponsible fiscal policy.

“The bond vigilante is coming back, so this is very important for asset prices in equity, house prices, fiscal policy, monetary policy, so no longer is this a free ride on bond markets anymore — so the government has to be very careful in terms of the future. You saw that last September, you saw that in Treasurys,” Zhao said.

“A few months ago, most people expected the U.S. government deficit would keep going down with growth slowing — it was 3.9% last year and it’s actually going up with growth slowing —…



2023-10-23 06:16:00

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