New data this week sharpened the global economic picture. Yesterday’s inflation figures were cooler than expected, yet borrowing costs from Europe to Asia are soaring as U.S. Treasury yields hit a more than twenty-year high.
CFR’s Sebastian Mallaby presided over a World Economic Update at the Council’s New York office yesterday to discuss what’s behind the global economy’s fluctuations. He was joined by CFR’s Rebecca Patterson, Adam Posen of the Peterson Institute for International Economics, and Natasha Sarin of Yale Law School.
While some have recently blamed the Iran war’s effect on inflation expectations for the bond market selloff that is sending yields rising, Patterson expressed skepticism. “If you break down what’s driven the change in [bond] yields since the beginning of March, it’s about 5 percent inflation expectations and 95 percent everything else,” she said.
The rest can be attributed to structural concerns, Patterson argued, including whether the Federal Reserve will raise rates and for how long, how the buildout of artificial intelligence (AI) infrastructure will impact economic growth, and worries about supply and demand for government bonds.
Higher Treasury yields have a concrete effect on how Americans live their lives.
“Higher yields, higher borrowing costs, are a drag on economic growth,” Patterson said. “It’s more expensive to get a mortgage, an auto loan, to borrow money to grow your business.”
Sarin underscored the “massive artificial intelligence capital expenditures that are competing for dollars. Given these very valuable private investment opportunities, the government just has to pay more to people if it wants people to hand them their dollars instead.”
This could be seen as an optimistic take on the “fundamental dynamism and growth” that the sector could bring to the U.S. economy, Sarin said. Another interpretation is that investors are becoming increasingly attuned to questions of U.S. fiscal credibility.
Last year’s reconciliation package is projected to add $3.4 trillion to the country’s primary deficits, and Social Security and Medicare trust funds are dwindling, Sarin pointed out. “The most likely outcome, at this moment, is that the way in which we are going to continue to make good on promises we’ve made to Social Security beneficiaries is by rolling over into general revenues, which is going to make our deficit picture worse.”
Rising yields aren’t limited to the United States. While the U.S. Treasury’s ten-year yield topped 5.3 percent, its highest level since 2002, French, German, Japanese, and United Kingdom (UK) government bonds also hit or came close to hitting multi-decade highs this week, before dipping slightly.
With so many G7 countries facing “major fiscal issues,” finding solutions may not be easy as countries compete for funds, and capital flows across countries, particularly in Asia, have lessened, Posen said.
The Daily Brief will bring you the latest on the global bond selloff as it arises.
