A just-published report focused on the building riot in global bond markets, which could soon become a threat to both global financial markets and the economic expansion.
The last time a war caused energy prices to soar was in 2022, which also coincided with rising bond yields as central banks belatedly responded to rising inflation. This time, most major central banks have been dovish, with policy rates falling in the past year (excluding the BoJ and RBA).
Global equity markets tumbled in 2022 as investors feared that an economic downturn would develop. This time, global equity markets have stayed strong and the stock/bond ratio has continued to new highs. Moreover, in 2022, credit spreads widened and corporate bond yields surged, whereas this year spreads have narrowed to tight levels and corporate bond yields are holding well below their 2022-2023 highs.
Net: monetary and fiscal conditions remain supportive, even the trend in corporate bond yields is still favorable for economic growth. While much hinges on a re-opening of the Strait of Hormuz, such an outcome would ensure that the global economic expansion rolls on. The downside will be even higher bond yields, after a brief reprieve when oil prices ease, as bond vigilantes will not like: lagging central banks, mounting fiscal excesses and sticky/firming inflation.
