The cure for high rates might be higher rates: a case study with UK long term yields | investingLive

Today, the UK 30yr yield jumped to a new cycle high reaching the highest level since 1998. The main narrative is of course rising debt concerns with governments continuing to spend and spend. The UK borrowing costs are the highest among the G7 nations.

But this is not a UK-only story. It’s a global one.

Long term yields have been rising in other major countries too and the problem is not just government spending but the dovish bias from central banks. This is also one of the main reasons for the surge in gold prices.

Inflation is the worst enemy for bonds and central banks are not prioritising the fight against inflation hard enough. In the case of UK, the BoE has been cutting interest rates in the face of the highest inflation among the G7 countries with a government that continues to run big deficits.

This is anathema for the bond market.

The cure for this mess could be ironically higher interest rates. Central banks should change their reaction function and put rate hikes on the table. For the UK, the damage might be already irreversible and to get long term rates down they might need a painful recession. I can’t see any other way out than contractionary policies.

Long term yields would come down if the central banks were to hike rates because the bond market would expect a big slowdown in the economy, higher unemployment and eventually lower inflation.

This is what central banks wanted to avoid by targeting a soft landing instead of getting inflation quickly back to target. Now, that soft landing could be gone and the only way out could be a hard landing.