When government bond rates go up, up…


THE FIGURE OF THE WEEK. Since January, long-term interest rates have been rising at breakneck speed. Should we be worried? I subscribe to 1€ the 1st month

The rate of the Obligation assimilable du Trésor (OAT) to ten years reached 1.54% on Wednesday, May 4, its highest level since August 2014. It still stood at 0.2% on 1 January. This upward movement can be observed all over the world. In the United States, the yield of the ten-year “Treasury Bond” has just exceeded the 3% mark, double what it was at the start of the year (1.51%), while in Germany, that of the “Bund” of the same duration crossed the threshold of 1%.

At the origin of this brutal rise in long-term interest rates, the return of inflation, which reached 8.5% across the Atlantic and 7.5% in the euro zone, levels not seen for several decades. Inflation has always been the sworn enemy of holders of government bonds insofar as it reduces the value of the coupons paid as well as that of the capital repaid at maturity. A mechanism of losses which had made the economist Keynes say that inflation was “the euthanasia of rentiers”.

Breaking inflation, but breaking growth?

Inflationary pressures are now also forcing central banks, whose primary mission is to ensure price stability, to tighten their monetary policy. That is to say, to raise their key rates – those at which they lend money to commercial banks – with the aim of slowing down the distribution of credit and reducing the quantity of money in circulation. This is what the Bank of England and the US Federal Reserve have started to do. The ECB should imitate them very soon.

The economic risk is that by seeking to “break” inflation, central banks also “break” growth, like this happened in the United States in the early 1980s. As prices rose by more than 13%, the Fed under Paul Volcker raised rates to 20%, initially causing a severe recession and a surge in unemployment, but then managing to permanently tame inflation, reduced to 3% from 1983.