The Econmist - USA (2021-11-06)

10 Leaders TheEconomistNovember6th 2021

G

lobal bondmarkets are wakeningfroma longslumber.The

Federal  Reserve  this  week  said  it  will  winddownitsvast

bond­buying programme. At the same time, bondinvestorsare

reacting to higher inflation: across a group of 35 economies,five­

year  bond  yields  have  risen  by  an  average  of  0.65percentage

points in the past three months. A shakeout is takingplacenot

only in emerging markets but also in rich countriessuchasAus­

tralia  and  Britain  (see  Finance  &  economics  section).Sudden

moves inevitably spark fears of market turmoil,alongthelines

of  the  “taper  tantrum”  in  2013.  However,  the  bondshifttaking

place today is actually very different.

Before the pandemic interest rates across the worldwerelow,

reflecting  dormant  inflation.  When  the  coronavirusstruckal­

most two years ago, most central banks prom­

ised to keep their policy rates lower for longer to

help  the  recovery.  Many  also  agreed  to  buy

bonds, reducing their yields.

The main reason for the sudden shift today

is  rising  inflation.  Among  the  38  economies

that  are  members  of  the  oecd,  a  club  of  rich

countries,  inflation  rose  to  an  uncomfortable

4.6% year on year in September. Soaring energy

and food prices are only part of the story: even if you strip those

out, the figure was 3.2%, the highest in almost two decades. 

For  months  central  banks  have  said  that  high  inflation  is  a

blip caused by temporary constraints in supply. But the action in

bond markets shows that investors reckon central banks are act­

ing  too  slowly.  Some  monetary  authorities  have  already  tight­

ened  policy.  Brazil  announced  a  1.5­percentage­point  rate  rise

last  week.  Central  banks  in  Canada  and  Australia  have  aban­

doned forecasts that said rates would stay low. As we write, the

Bank  of  England  is  due  to  decide  whether  to  raise  rates.  Some

policymakers  are  standing  firm:  Christine  Lagarde,  the  boss  of

the European Central Bank, has insisted that it is “very unlikely”

to raise interest rates next year. 

Thespectreofcentralbanksdivergingfrommarkets,andof

consequentswingsinmarketinterestrates,willunsettlethose

withmemoriesof2013,whentheFedclumsilyrevealeditsunex­

pectedintentiontobeginscalingbackitsprogrammeofbond

purchases.Theresultingglobalmini­panicdentedgrowthand

clobberedsomeemergingeconomies,particularlythosewith

bigdollardebts.

Yetthisisnot2013.Onedifferenceisthattheshiftinbond

marketsismorenuanced.Theincreasesofarinnominalfive­

yeargovernment­bondyieldsinAmerica,forexample,isless

thanhalfwhatitwaseightyearsago.Realbondyields,afterac­

countingforexpectedinflation,areminus1%,stillwithinspit­

tingdistanceofrecordlows.Thatwillsupporteasyconditions

intherealeconomy.Andevenasshorter­term

government­bondyieldsrise,therehasbeen

muchlessofa moveinlonger­termbonds.

Theotherdifferencetodayistheabsenceof

financial panic. A rising cost of debt can cause

defaults and capital flight. But many emerging

economies  have  healthy  foreign­exchange  re­

serves,  making  them  resilient.  Equity  markets

show no sign of distress—share prices hit a re­

cord high this week. Shares in banks are up by 28% this year, be­

cause gradually rising interest rates can boost their profits. And

bond  markets  remain  open  for  business.  In  October  emerging

markets  outside  China  issued  near­record  levels  of  corporate

and sovereign debt.

No  cause  for  alarm,  then.  Markets  are  betting  that  central

banks need to bring interest­rate rises forward, not that they will

lose control of inflation. Still, it is worth bearing in mind the ex­

traordinarily  difficult  task  that  central  banks  face.  During  the

unpredictable tail end of a pandemic, they must try to normalise

ultra­loose  monetary  policy  amid  sky­high  asset  prices,  heavy

debt levels and above­target inflation. Taper tantrum2.0is not

yet under way. But don’t rule out a bigger bond brawl.n

The message fromthenewlyrousedfixed-incomemarkets

Government bonds

Two-year yields, 2021, % Canada

US

1.

0.

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May JulJun Aug Sep OctNov

Australia

Britain

Bond traders stir

Markets and inflation

T

he factsare  damning.  Owen  Paterson,  a  former  Tory  Cab­

inet  minister  now  on  the  backbenches,  was  paid  £9,

($12,700)  a  month  for  consulting  work  by  two  companies,  one

and a half times his parliamentary salary. And, sure enough, he

earned his keep by lobbying ministers and officials on their be­

half.  The  commissioner  for  standards,  an  independent  officer,

concluded that he had brought Parliament into disrepute.

Its cross­party standards committee recommended a 30­day

suspension. But on November 3rd, in a scheme cooked up barely

24  hours  earlier,  Tory  mps  voted,  under  instruction  from  the

government, to sidestep the whole sleazy mess by creating a new

committee to examine the way mps are overseen. Mr Paterson’s

case will thus be reconsidered. It was as if an appellate court had

found a guilty verdict legally correct but unpalatable, and decid­

ed to change the law rather than pass sentence.

Mr Paterson’s defenders argued not on substance but on pro­

cedures,  which  they  said  were  unfair,  even  though  Parliament

wrote  them  and  could  have  changed  them  at  any  time  in  the

past.  Some  said  he  had  been  treated  more  harshly  because  he

was a Conservative and a Brexiteer—the standards committee is

chaired  by  a  (respected)  Labour  mp.  Yet  Mr  Paterson  blatantly

broke the rules. This week’s vote compounded his offences by al­

Boris Johnson treats checks and balances with contempt

Are rules for losers?

Government in Britain