Yields are rising: “Multiple blows to the neck” for interest-bearing securities

Frankfurt Investors are taking more risks again. This can be seen even more clearly than in the rise in share prices in the fall in the prices of safe German and American government bonds. Mirroring the fall in bond prices, their yields have risen so significantly that they are now clearly higher than they were before Russia’s war of aggression against Ukraine began almost four weeks ago.

By the beginning of March, the yields on the ten-year bonds that were particularly in focus had fallen by up to 0.3 percentage points. The yield on the ten-year federal bond was even negative again at times, which means that investors were willing to pay the federal government a kind of fee for being able to park the money safely in Germany.

Since then, the ten-year Bund yield has risen to as much as 0.4 percent. This corresponds to the highest level since November 2018. In the USA, the yield on interest-bearing securities called Treasuries rose to almost 2.2 percent last week, the highest level since May 2019.

Elmar Völker, economist at Landesbank Baden-Württemberg, speaks of a “multiple blow to the neck” for the bond market. In addition to investors turning away from safe havens, inflation concerns and interest rate speculation are weighing on bonds. Hauke ​​Siemßen, bond strategist at Commerzbank, also assumes that bond yields will continue to rise in the medium term – mainly because inflation expectations should continue to rise.

Inflation, turnaround in interest rates and higher supply are weighing on

The inflation rate recently rose to 7.9 percent in the USA and 5.8 percent in the euro area. The war in Ukraine and the sanctions against Russia have further increased inflation concerns with regard to commodity prices and bottlenecks in the supply chains. The US Federal Reserve has already reacted to this and last week raised interest rates for the first time since 2018. At the same time, the Fed prepared investors for six more rate hikes this year.

Higher key interest rates also pull capital market interest rates, i.e. yields on the bond markets, upwards. At the same time, the Fed could start reducing its balance sheet as early as May by no longer replacing maturing bonds with new bond purchases. On balance, the Fed has already halted its bond purchases.

The European Central Bank (ECB) has at least announced a first interest rate hike for the current year. As a first step, the ECB is reducing its bond purchases faster than planned.
According to Völker, especially in Germany, the prospect of higher national debt due to the Ukraine crisis and rising armaments spending is causing rising returns. The “looming new wave of supply” of government bonds could become a “particular stress test” for the market.

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