What if too rapid an economic recovery causes the markets to panic? The recent sharp rise in government borrowing rates, reflecting rising inflation expectations, makes some people fear this scenario.
In clear increase for more than a week, the American ten-year rate, benchmark on the market, climbed Monday to 1.39%, its highest for a year, dragging in its wake the German rate to -0.28%, a level unprecedented since last June, and bringing the French rate closer to the symbolic bar of 0%, before the situation calmed down a little on Tuesday.
Recovery plan and optimism
At issue: the fact that many investors, thanks to the vast recovery plan announced by US President Joe Biden, encouraging economic indicators and an improvement in the health situation, are counting on a general increase in prices at middle term.
“There are tensions on producer prices with a surge in the prices of cargo ships on trade routes to China, and strong tensions on the prices of raw materials”, explains Tangi Le Liboux, strategist of the broker Aurel BGC.
It is to be expected that energy prices will “increase further”, he continues.
“Consumption in the United States could rebound more strongly than expected”, adds the expert, according to which “the whole question is to know if this rise in prices will be temporary and of a limited extent”.
For now, the target of inflation around 2% posted by the European and American central banks still seems far away. In the United States, the rise in prices accelerated to + 0.4% in December over one month but only stood at + 1.3% over the year, while in the euro zone, it became again positive in January after five negative months, at + 0.9% over the year.
It is “unlikely” that inflation will establish itself in a lasting way above the target of 2% annual which the Fed aims, thus affirmed Friday the chief economist of the International Monetary Fund (IMF), Gita Gopinath.
Risk of crash?
More than the rise in bond yields itself, a consequence of readjustments made by the market in its inflation expectations, it is its speed that is worrying.
“If we have a sharp acceleration in rates, that’s when the markets”, which have been evolving for months in an environment where bond yields are very low, “may crack”, first in the United States. United, warns Mr. Le Liboux.
“If the ten-year US rate continues to rise while the Fed leaves its key rates unchanged, this will put pressure on the latter, which at one point will have credibility problems,” said Le Liboux.
The American institution has already admitted that it could tolerate, for a certain time, an inflation higher than its target of 2% without increasing its rates.
But if “the markets start to think that the Fed is late and that it is wrong”, then “there would be a risk of panic” because investors would start “to anticipate a monetary tightening faster than expected”, underlines Mr. Le Liboux.
No short-term fears
However, the boom in the bond markets leaves “a little skeptical” José Antonio Blanco, head of management for third parties at Swiss Life AM.
With the current monetary and budgetary largesse, the potential for inflation will materialize but certainly not this year and “probably not even next year”, he said.
This “potential for inflation can only occur if there is (…) more or less full employment and this is something that we do not see at the moment”, he notes, to a time when the labor market is “very far” from being solid according to the admission of the boss of the Fed himself in early February.
“The yield on ten-year US Treasury bills” which have “hibernated long enough”, is expected to rise, anticipates Nicholas Colas, co-founder of the US financial data company DataTrek, but we are far from the aftermath of the 2009 crisis when they had “doubled in six months”.