THE INTERSECTION OF POLITICAL UNCERTAINTY AND GLOBAL DEBT MARKETS
Kristian Kerr, Head of Macro Strategy, LPL Financial
Lawrence Gillum, CFA, Chief Fixed Income Strategist, LPL Financial
Global bond markets have sold off recently due to uncertainty surrounding key political changes most notably in France and Japan. Japan’s Prime Minister, Shigeru Ishiba, resigned last week, which adds a potential shift in fiscal policy to concerns about slowing monetary policy normalization. Additionally, France’s prime minister stepped down recently after losing a confidence vote after trying to pass a budget with austerity measures. Add concerns about ongoing fiscal sustainability issues in the U.K. and debt and deficit concerns in the U.S. and it makes sense that longer maturity bond yields, globally, have risen. France and the U.K. remain important buyers of U.S. Treasuries, so as their home market yields increase, U.S. rates look less attractive, which puts upward pressure on U.S. yields. That said, as we’ve seen in the U.S., particularly after the weaker than expected August jobs report, bond yields tend to follow the economic data. The Federal Reserve (Fed) is set to cut interest rates this week so we may be past cyclical highs. But with developed market debt levels expected to continue to increase with seemingly little appetite to reduce budget deficits, long-term bond yields may need to remain elevated to attract buyers.