Bond market trends: inflation expectations push bond yields higher
After growth concerns forced yields lower in recent months, inflation fears dominated in September. US 10-year yields moved up more than 20 basis points to above 1.5% in September. German yields followed the trend, rising above -0.2%, a level it had not reached since the end of June. Recent inflation numbers have risen due to baseline effects, as compared to the very low numbers during the coronavirus crisis a year ago. However, as these effects fade, inflation is likely to remain somewhat higher than previously expected due to price pressures from supply constraints and rising commodity and energy prices. The rise in German nominal interest rates was mainly due to the rise in the break-even rate (reflecting inflation expectations), while in the US the increase was primarily driven by the rise in the real interest rate (reflecting monetary policy expectations). Bond purchases by central banks will be scaled back in the coming months, both in the United States and in Europe.
Corporate bond spreads narrowed significantly for both Investment Grade and High Yield issuers, returning to almost their lowest levels of the year (in May). Corporate bond prices were supported by the publication of strong second-quarter corporate results. The balance sheets of European companies are indeed healthy.