OPINION
Market Rating Before FOMC MeetingJan 31
Global Bonds: The Cost of Debt increases
As pandemic is losing its effect on the economy, strong inflation pressures and high cost of debt top the agenda. During the pandemic period, the increase in the total demand factor is the main driver of inflation pressures, reflecting the strong monetary expansion implemented by the central banks of developed and developing countries to repair economic damage and the effective subsidies of the financial authorities.
In addition, global inflation pressures tend to solidify as supply chain disruptions and supply bottlenecks increase as a result of the measures taken against the pandemic, Russian –Ukrainian war also contributes to inflation and inflation expectations by increasing commodity prices.
The fact that international commodity prices, especially energy and grain products, have started to rally, especially with supply concerns related to the sanctions imposed on Russia by western countries due to the invasion, is an important anchor in the inflationary pressures following the pandemic.
As a matter of fact, the effect of the upward trend in inflation and inflation expectations on treasury yields is also high. US 10-year treasuries are around 2.884, the highest level of the last 3.5 years. Federal Reserve's statement that the Fed will hike rates by 6 times this year, paving the way for more tightening, is a strong factor on these rise in treasuries.
In Europe, ECB didn't change its rates against the forecasts, yet indicated that the rates will be increased gradually, leading to increases in Germany Government Bond 10Y and it hit 0.881, the highest level of the last 7 years.
Looking at emerging markets, Russian bonds rose aggressively after the Ukrainian invasion, hitting a record high of 19.89 percent on March 22. Central Bank of Russia (CBR) policy rate increased to 20 percent from 9.5 percent by 1050 bps subsequently, securing a path of financial stability and then, this rate was declined to 17 percent, leading Russian 10-year bonds to be traded around 10.50 percent. In Turkey, due to the loose monetary stance of the CBRT 10-year treasury yields are around 22 percent.
However, it is clear that there has been a significant increase in cost of debt, albeit on a country-by-country basis, and this is the main trend in the global bond market. Given the fact that the sanctions imposed on Russia due to the invasion of Ukraine will not be removed directly, even if the war ends soon, in other words, its damage to the Russian economy will continue, it is very clear that the commodity pressure on the outlook for global inflation will continue. It is also likely that the increase in cost of debt will continue after the steps taken by central banks within the scope of total demand guidance.
At this point, it should be noted that the dollar index has again exceeded 100.00. While investor risk sentiment indicators have been mixed in international markets, the strong outlook of the dollar index and the increase in bond rates may put pressure on sales in developing country currencies and stock markets. In addition, downside risks may occur in the budget balances of the developing countries' financial authorities, which needs liquidity to subsidize the inflation towards the exit from the pandemic, against the higher cost of debt and the more valuable dollar.
In addition, global inflation pressures tend to solidify as supply chain disruptions and supply bottlenecks increase as a result of the measures taken against the pandemic, Russian –Ukrainian war also contributes to inflation and inflation expectations by increasing commodity prices.
The fact that international commodity prices, especially energy and grain products, have started to rally, especially with supply concerns related to the sanctions imposed on Russia by western countries due to the invasion, is an important anchor in the inflationary pressures following the pandemic.
As a matter of fact, the effect of the upward trend in inflation and inflation expectations on treasury yields is also high. US 10-year treasuries are around 2.884, the highest level of the last 3.5 years. Federal Reserve's statement that the Fed will hike rates by 6 times this year, paving the way for more tightening, is a strong factor on these rise in treasuries.
In Europe, ECB didn't change its rates against the forecasts, yet indicated that the rates will be increased gradually, leading to increases in Germany Government Bond 10Y and it hit 0.881, the highest level of the last 7 years.
Looking at emerging markets, Russian bonds rose aggressively after the Ukrainian invasion, hitting a record high of 19.89 percent on March 22. Central Bank of Russia (CBR) policy rate increased to 20 percent from 9.5 percent by 1050 bps subsequently, securing a path of financial stability and then, this rate was declined to 17 percent, leading Russian 10-year bonds to be traded around 10.50 percent. In Turkey, due to the loose monetary stance of the CBRT 10-year treasury yields are around 22 percent.
However, it is clear that there has been a significant increase in cost of debt, albeit on a country-by-country basis, and this is the main trend in the global bond market. Given the fact that the sanctions imposed on Russia due to the invasion of Ukraine will not be removed directly, even if the war ends soon, in other words, its damage to the Russian economy will continue, it is very clear that the commodity pressure on the outlook for global inflation will continue. It is also likely that the increase in cost of debt will continue after the steps taken by central banks within the scope of total demand guidance.
At this point, it should be noted that the dollar index has again exceeded 100.00. While investor risk sentiment indicators have been mixed in international markets, the strong outlook of the dollar index and the increase in bond rates may put pressure on sales in developing country currencies and stock markets. In addition, downside risks may occur in the budget balances of the developing countries' financial authorities, which needs liquidity to subsidize the inflation towards the exit from the pandemic, against the higher cost of debt and the more valuable dollar.
