There is a good deal more to the rapid rise in bond yields around the world, not least in Asia, than meets the eye. It suggests a recognition by financial markets that governments are spending beyond their means, tax revenues and borrowing power.
The implication is that either taxes need to rise or public spending needs to fall, or alternatively that financial markets, stock markets in particular, must shift their priorities away from glamour stocks in the tech and artificial intelligence (AI) sectors towards investment in more basic public goods.
That, in turn, points to a coming correction in richly valued stocks towards less glamorous sectors such as energy, infrastructure and health – seemingly pedestrian yet essential. Either way, recent developments suggest the need for a reorientation in investment priorities.
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These facts do not appear to have been fully taken on board yet by equity investors, given that share valuations continue to soar, not least in Japan where the benchmark Nikkei index has broken another record by leaping above 65,000 points.
A recent International Monetary Fund briefing in Tokyo heard financial expert views that AI stocks were significantly above “fair value” andthat the investor focus on just a few sectors had reached risky and unsustainable levels. Yet it is in bond markets that changing sentiment is sounding the clearest warnings. Yields on government and other bonds are rising briskly as bond prices fall – this latter development being less commented on than the former.
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Sovereign yields are climbing sharply almost across the world – notably in the United States, Britain and Australia among advanced economies and also across Asia from India to Indonesia – as levels of government indebtedness reach or approach record highs. The process is becoming self-feeding because as yields and debt service costs escalate, so too does demand for new borrowing.