Rising inflation can reduce a bond’s real yield because the currency in which the bond is issued depreciates over time. Bond yields have been falling since last week after major central banks pushed back calls to raise interest rates. In recent weeks, many central banks, including the Bank of England, have decided to postpone an interest rate hike to cope with rising inflation.
The Bank of England was due to increase its official discount rate on November 4.
However, the BoE decided to stick to the historic low of 0.1% for a longer period.
Inflation in the UK has increased over the past year and is currently 3.1%.
Following a pattern similar to that of the Bank of England, central banks in the euro area have delayed an interest rate hike.
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In other European countries, the effect was similar.
The yield on Italian 10-year bonds hit a 26-day low at 0.847 percent.
Italy’s 30-year rate hit its lowest level since September 23 at 1.683%.
In Germany, the 10-year national inflation-linked bond, which takes inflation into account in real time, fell to a record low of 2.09%.
Speaking to Reuters, senior rates strategist at ING Antoine Bouvet said central banks’ pullback against implementing interest rate hikes had helped explain the downward trend in real bond yields.
He said: “Central banks in developed markets have wasted the opportunity to prove that they are not behind schedule, so the demand for inflation hedges increases accordingly.
“Whether or not inflation fears are justified is irrelevant.
“In the short term, investors have no reason to doubt that the risk of inflation is increasing.”
However, on Monday, the chief economist of the European Central Bank (ECB), Philip Lane, said raising interest rates to curb rising inflation in the euro area would be counterproductive.
Although ECB supervisor Andrea Enria said on Tuesday that the ECB’s low interest rates are now hurting bank margins.
Producer inflation data in the United States caused the yield on the benchmark 10-year US Treasury bond to decline.
Wholesale product prices in the United States were up 8.6% from a year ago in October.
This is the largest annual increase in the producer price index in the United States over the past 10 years.
US Federal Reserve Vice Chairman Richard Clarida said: “If the outlook for inflation and unemployment turns out to be the real results, then I think these three conditions for raising the target range for the fund rate. will have been fulfilled within a year. end of 2022. “