In a recent analysis by Swiss Re Institute, experts suggest that the recent surge in longer-dated US government bond yields is not indicative of an impending bond crisis or concerns over US credit worthiness.
Instead, the driving forces behind the increase in yields are rooted in global factors, including inflation persistence and a market reassessment of the nominal “neutral rate.”
These factors include the announcement of higher-than-expected debt supply by the US Treasury, a downgrade in the US credit quality by ratings agency Fitch, and shifts in yield curve control policy by the Bank of Japan. Federal Reserve Chair Powell’s indication of potential quantitative tightening also contributes to the yield increase.
Importantly, the analysis emphasises that the main driver behind the rise in yields is a market reassessment of the nominal “neutral rate” due to inflation persistence, rather than US-specific deficits or government bond supply.
This market-driven repricing aligns with historical trends of increasing yields towards the end of hiking cycles.
Notably, the current yield curve environment differs significantly from past bond crisis scenarios, as these crises have historically occurred when the Fed funds rate was near 0% and inflation-adjusted yields were low or negative.
Regarding the potential for further yield increases, experts suggest that sustained economic reacceleration, including core inflation and wage growth, could drive yields higher.
However, they also highlight that much of the current-cycle monetary tightening has already taken place, and a slowdown in US growth is anticipated in the latter part of 2023.
For insurers, who hold a substantial portion of their assets in Treasuries, yield movements remain a significant consideration.
While ALM frameworks offer some insulation from strong yield fluctuations, experts caution that violent yield movements can impact other asset classes, necessitating vigilant balance sheet management.
