Sovereign bond yields rose sharply last October before easing later on after some expectations indicated a moderation in the pace of inflation. However, continued hawkishness by central banks led to an increase in bond yields in the second half of December.
According to the report of the National Bank of Kuwait, which Namazon received its copy today, Monday, the Gulf sovereign medium-term bonds outperformed their global counterparts, as they ended the trading of the last quarter of 2022 with better performance, and their returns declined on a quarterly basis.
On the other hand, the latest inflation data from most economies indicated that the worst of the consumer price hike is likely to have passed, although prices are still higher than before 2022. In addition, price momentum appears to be shifting from commodities (such as energy) to services, which may contribute to maintaining a relatively high core inflation rate over the coming months.
In December, the major global central banks moved to raise interest rates by only 50 basis points, following the big hikes they implemented earlier in the year. We may witness more interest rate hikes in the first half of 2023, due to rising consumer prices and tightening labor market conditions, which may keep bond yields rising from a historical perspective. On the other hand, any pivotal shift in monetary policies that supports lowering interest rates during The latter part of 2023 could lead to higher bond prices and thus lower yields.
At the same time, Gulf bond issuances reversed their downward trend and rose to $15.9 billion in the fourth quarter of 2022, compared to $11.8 billion in the third quarter of 2022. Saudi Arabia acquired the highest value of new sovereign and quasi-sovereign issuances ($11.3 billion).
The rise in oil prices this year contributed to strengthening the financial position of Gulf governments, which in turn led to their ability to reduce the spreads between Gulf sovereign bonds and US Treasury bonds despite the decrease in financing needs.
Bond yields fell during the fourth quarter of 2022, compared to their highest levels in several years in October. However, benchmark bonds gave up gains (excluding UK sovereign bonds) in late December, after hawkish rhetoric from central banks, and bond yields ended the fourth quarter with net growth on a quarterly basis.
During the last quarter of the year, the 10-year German bund yield rose by 45 basis points on a quarterly basis, as the European Central Bank president stuck to his hawkish stance and expected to pass two similar rounds of interest rate hikes by 50 basis points during the first half of 2023.
In Japan, the Bank of Japan unexpectedly allowed JGB yields to widen by 50 basis points in either direction from their 0% target. This resulted in a rapid jump of 17 basis points to revenue during the fourth quarter of 2022.
On the other hand, the US 10-year Treasury yield witnessed marginal change on a quarterly basis, although it declined by about 40 basis points compared to the peak levels recorded in October after the headline inflation rate moderated at a steady pace.
As for British bonds, they recovered significantly after the current Prime Minister Rishi Sunak backtracked on implementing the fiscal easing measures announced by former Prime Minister Liz Terrace. With the outlook for the UK economy deteriorating further, market expectations were in favor of a slower rate hike by the Bank of England.
Economic growth prospects, Federal Reserve policies and inflation expectations continue to influence bond market dynamics. The continued tightness of the labor market reinforced hopes that the US economy would achieve a less severe downturn than was previously imagined. If labor market trends remain unchanged, the increased trend towards riskier asset classes, including equities, may put some downward pressure on sovereign bond prices.
The persistent gap in the inflation path in the short and medium term and central banks setting the target level of inflation of 2% may also lead to maintaining high interest rates, which in turn leads to enhancing revenues and pushing them higher. On the other hand, the sharp slowdown in inflation rates due to the sudden economic weakness, and the global central banks' adoption of a less stringent approach, may lead to an increase in bond prices.
In addition, any further significant decline in the price of the US dollar will also be a supportive factor for bond prices in other markets, including Europe. At the same time, the Federal Reserve is currently seeking to implement negative quantitative tightening policies by getting rid of its balance sheets of outstanding US Treasury securities and mortgage-backed securities at a value of $60 billion and $35 billion per month, respectively, which may enhance inflationary pressures even with stability. other variables. Note that changing these limits or announcing more stringent measures will affect the bond market.
