英国国家经济和社会研究所-季度定期保费跟踪-债券市场对夏季选举的反应英

NIESR

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BondMarketsReacttoSummerElections

PaulaBejaranoCarbo,MonicaGeorgeMichailandHaileyLow

June2024

“Inthesecondquarterof2024,the10-yearUKgovernmentbond(gilt)yieldhasfluctuatedaround4.2percent,risingfrom4.0percentinthefirstquarteroftheyear,drivenbyslightlyrisingbutvolatileshort-terminterestrateexpectationsandmorerecently,arisingtermpremium.BothdevelopmentsmayreflectincreaseduncertaintyinmarketsfollowingtheannouncementoftheUKgeneralelection.Further,upwards-trendingco-movementsintermpremiaestimatesinbothBritishandEuropeaneconomiesfollowingtheEuropeanParliamentelectionsaresuggestiveofspilloversofinternationalriskanduncertainty.”

PaulaBejaranoCarbo

Economist,NIESR

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June24-2-

niesr.ac.uk

NationalInstituteofEconomicandSocialResearch

Figure1-UK10-yeargovernmentbondyieldanddecompositionbyaveragecurrentandexpectedfutureshort-terminterestratesandriskpremium(percent)

Source:Authors’calculationsbasedonBankofEnglanddata

MainPoints:

•The10-yearUKgovernmentbond(gilt)yieldwasrisingfromearly2022tomid-2023duetotheBankofEngland’smonetarytighteningcycle,buthassincebeenrelativelystable.Inthesecondquarterof2024,the10-yeargiltyieldhasaveraged4.2percent,risingfrom4.0percentinthefirstquarteroftheyear,drivenbyvolatileshort-terminterestrateexpectationsandmorerecently,arisingtermpremium.Bothdevelopmentsmayreflectincreaseduncertaintyinmarketsfollowingrecentpoliticalevents.

•Withinflationfallingto2percentinMay,webelievethat,conditionaloninflationarydevelopments,theMPCmaybeginitsmonetarylooseningcycleinAugust.Asnotedinthis

NIESRdiscussionpaper,

theMPCcouldconsiderpublishingaforecastforthepathofinterestratesinitsReports,asisdoneinothercentralbanks.Thiswouldhelpadjustmarkets’,andthewiderpublic’sexpectations,toaparticular,butnotdefinite,trajectoryofmonetaryloosening–potentiallypreventingfuturevolatilityinthegiltmarket.

•MostEuropeancountries,exceptforGermany,sawaslightuptickintermpremiainJune.ThismaybeaconsequenceoftheEuropeanParliamentaryelections,andthedecisiontocallanelectioninFrance,givensignificantmovementsinourestimatesofriskpremiaonimpactfollowingtheseevents.Notably,thegapbetweenFranceandGermany’s10-yearbondyieldsisbacktolevelslastseenduringthe2017FrenchPresidentialElection.UncertaintyoverwhichpartieswillgaincontrolinFranceaddstogeopoliticalriskthatwillaffecttheeuroareamorewidely.

•TheFederalReserveremainscautiousagainstanearlyinterestratecutgivenastickierthanexpectedinflationrateandacontinuingstronglabourmarketperformance.Therefore,despitegraduallyfalling,UStreasuryyieldsremainhighduetoelevatedinterestrateexpectationsandupwards-trendingriskpremia.

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June24-3-

UKTermPremium

Sinceour

lasttermpremiumtracker

publishedinthefirstquarterof2024,the10-yearUKgovernmentbondyieldhasaveraged4.2percent,risingfrom4.0percentinthefirstquarteroftheyear.InthisTracker,wedecomposelong-termbondyieldsintotwocomponents:expectationsofthefuturepathofshort-terminterestratesandatermpremium.Theterm(orrisk)premiumisthecompensationinvestorsrequireforbearingtheriskthatshort-termbondyieldswillnotevolveasexpected.Thistrackerisbasedondailyestimatesupuntil20June.

RisingUKbondyieldsinthepasttwoyearshavebeendrivenbyelevatedshort-terminterestrateexpectationsinresponsetotheMPC’saggressivemonetarypolicytighteningcycle.Thatsaid,interestrateexpectationshavebeenonadecreasingtrendsincemid-2023,afterpeakingat5.78percentinJuly2023,thehighestlevelsincethesecondquarterof2000.Thisoverallmoderationininterestrateexpectationsrelativetolastsummerlikelyreflectssignificantfallsinthe

CPIinflation

rate.WithCPIinflationfallingtotheBankofEngland’s2.0percenttargetin

May,

monetarylooseningisonthehorizon.Broadly,thisnearlyyear-longsofteningofinterestrateexpectationscanbeinterpretedasasignthatmarketsalsobelievethattheBank’spolicyratehaspeaked,andratecutscanbeexpectedinthecomingmonths.Thatsaid,figure1aboveindicatesthatinterestrateexpectationshaveyettofallbelowtheirDecember2023peak,whenmarketsaroundtheworldbecameoptimisticabouttheprospectofratecutsinearly2024.Sincelastquarter,interestrateexpectationshaveexhibitedsomevolatility,possiblyinrelationtotheannouncementofthegeneralelection.Inparticular,interestrateexpectationsjumped15basispointsonimpactfollowingtheannouncementofthegeneralelectionon22MaybuthavebeensteadilydecreasinginJune.

Overall,thecorrespondingtermpremiumonUK10-yeargovernmentbondyieldssignalsthatinvestorsarefeelingconfidentaboutthepathofshort-terminterestrates.However,thetermpremiumhasrisensharplysinceearlyJune,rising26basispointsbetween7and10June,theweekendinwhichtheEuropeanParliamentelectionswereheld.Giventheglobalintegrationoffinancialmarkets,asignificantshareofthemovementsobservedatthelongerendoftheyieldcurvereflectchangesininternationalriskanduncertainty,aswellasmonetarypolicydevelopmentsabroad.Theco-movementsintermpremiaestimatesamongBritishandEuropeaneconomiesillustratedinfigure2areparticularlysuggestiveofspilloversfollowingtheseelections.

Withinflationfallingto2percentinMay,webelievethat,conditionalonpriceandwageinflationdevelopments,theMPCmaybeabletobeginitsmonetarylooseningcycleinAugust.However,inflationissettoreboundsomewhatinthesecondhalfof2024duetobaseeffectsandstill-highcoreandwageinflation.Asaresult,thisexpectedAugustratecutmayonlybeasmallsignal,andtheMPCmayproceedwithcautionthroughouttherestofitstighteningcycle.Whetherthiscreatesuncertaintyforinvestorswillbecomeclearerinthecomingmonths.NIESRhavebeenarguingforsometimenowthattheMPCoughttoimproveitscommunication;inparticular,itmaywanttogenerategreatercertaintyaroundtheexpectedpaceofmonetary

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June24-4-

loosening.Asnotedinthis

NIESRdiscussionpaper,

theMPCcouldconsiderpublishingaforecastforthepathofinterestratesinitsReports,asisdoneinothercentralbanks,suchastheNorgesBankandtheSverigesRiksbank.Thiswouldhelpadjustmarkets’,andthewiderpublic’s,expectationstoaparticular,butnotdefinite,trajectory.

Figure2-10-yeartermpremiumestimatesacrosscountries(percentagepoints)

Source:Authors’calculationsbasedondatabyBankofEngland

USTermPremium

Afterreachingahighof4.8percentinOctober2023,the10-yearUSTreasuryyieldhadgraduallyfallento4.2percentinthefirstquarterof2024,drivenbydecreasingshort-terminterestrateexpectations.Sincethen,yieldsroseinAprilandMay,averaging4.5percent,beforereturningtoanaverageof4.3percentinJune.

Despitegraduallyfalling,treasuryyieldsremainhighamidstelevatedinterestrateexpectationsandupwards-trendingriskpremia.Thiscomesamidststickyinflationrates,whichhavefluctuatedaround3percentthepastyear,despitetightmonetarypolicy.Inaddition,thelabourmarkethasrecordedastrongerthanexpectedperformance,asindicatedbytheJune7thdatarelease-coincidingwithajumpfrom4.28to4.43percentinyieldsinasingleday.Asaresultofelevatedunderlyinginflationarypressures,theFedremainscautiousagainstanearlyratecut,asindicatedbythedecisiontokeepinterestratesunchangedduringtheJune11-12FederalOpenMarketsCommittee(FOMC)meeting.

UncertaintyaroundtheupcomingUSelectionsislikelyoneofthemaindriversoftermpremia.Additionally,giventhatinterestratecutsaretakinglongertomaterializethanexpected,thereisaneedfortheFOMCtoimprovecommunicationandletmarketsandthepublicknowhowitplanstoconductmonetarylooseningtominimizevolatilityandupwardriskstothetermpremium.

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June24-5-

Figure3–US10-yeargovernmentbondyieldanddecompositionbyaveragecurrentandexpectedfutureshort-terminterestratesandriskpremium(percent)

Source:Authors’calculationsbasedondatabyFREDdatabaseattheFederalReserveBankofSt.Louis

EuroAreaCountries’TermPremia

Sinceour2024Q1tracker,European10-yearbondyieldshaveremainedlargelystable,thoughrisingsomewhat.Termpremiaremainedstableineuro-areacountriesduringthemajorityofthesecondquarterof2024,thoughallcountriesapartfromGermanysawaslightuptickinJune,particularlyintheaftermathoftheEuropeanParliamentelections.Thus,thisrecentriseintermpremiamightsignalrisingpoliticaluncertaintybeingpricedintoyields,especiallyinFrance,wheretermpremiajumpedby10basispointsbetweenthe7thand10thofJune,relativetoaeuro-areaaverageriseof7basispoints,anda4basispointsriseinGermany.Notably,thebondyieldspreadbetweenFranceandGermanyremainsclosetoits7-yearhigh(Figure2).

AveragetermpremiaintheEuroArearemainelevatedincomparisontotheUnitedKingdomandUnitedStates.Further,bondmarketfragmentationremainsanissueintheEuroArea,especiallythewideningofriskpremiaspreadsbetweenmajorcountries.Ourdecompositionofeuro-areabondyieldssuggeststhatItalyandGreeceremaindecoupledfromtrend,withourlatesttermpremiaestimatesforbothcountriesbetween0.5-1percentagepointshigherthantheeuroareaaverage.However,itisencouragingthatthisfragmentationhasdecreasedinthesecondhalfof2024,particularlyforGreece–whichpreviouslyhadatermpremiumover2percentagepointsabovetheeuroareaaverage.Still,bondmarketfragmentationpresentsanimportantrisktofinancialstabilityandthetransmissionofmonetarypolicyintheEuroArea.Thoughdivergingtermpremiaalonedonotnecessarilysignalthestartofanewliquiditycrisis,whencoupledwithmarketfragmentationorpossiblyspeculativedynamicsthethreatstofinancialstabilitycertainlyincrease.

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June24-6-

Figure4-Euro-area10-yeargovernmentbondyieldanddecompositionbyaveragecurrentandexpectedfutureshort-terminterestratesandriskpremium(percent)

Source:Authors’calculationsbasedondatabyDatastream

Background

Themodelweemployenablesthedecompositionoflong-termbondyieldsintotwocomponents:expectationsofthefuturepathofshort-termyields,andatermpremium.Theseare,respectively,theaveragecurrentandexpectedfutureshort-terminterestrates,andthecompensationinvestorsrequireforbearingtheriskthatshort-termyieldswillnotevolveasexpected.

TheNationalInstitute’sTermPremiumTrackeraimstoprovidequarterlyupdatesofthebondtermpremiaestimatesfortheUnitedKingdom,theUnitedStatesandsomeselectedEuropeancountriesbasedoncurrentdailyzero-couponbondyielddata.Theestimatesofbondtermpremiaatthe10-yearmaturityandtheexpectedaverageshort-termratesforthesamematurityarebasedondailydatafrom1961to3September2021.Theanalysisisbasedonafive-factor,no-arbitragetermstructuremodel,describedindetailinAdrianetal.(2013and2014).Theestimatesweobtainforth