On Friday, the yield on the 10-year US Treasury note rose to 1.634 percent, up from 1.525 percent a session earlier, hitting its highest yield since February last year.
Analysts have been searching for explanations for the surge in the yields, which rise when bond prices fall, with some speculating that a US$1.9 trillion fiscal stimulus package signed by US President Joe Biden and a speech he gave on Thursday might have led to more upbeat sentiment among investors, prompting them to ditch US government bonds and flock to the stock markets.
The Dow Jones Industrial Average on Friday rose to a new high of 3,778.64 points — its best week since November last year.
Investors pay close attention to long-term US Treasury yields because they play a major role in determining borrowing costs. Yields on 10-year bonds started rising sharply last month amid increased expectations of an economic rebound and interest rate hikes from the US Federal Reserve to tame inflation.
Even though Fed Chairman Jerome Powell on March 4 reaffirmed that the central bank would keep its easy money policies in place until the goal to increase the employment rate is reached and as long as the inflation rate stays below 2 percent, many investors expect the economic rebound to spur inflation and the Fed to tighten its monetary policy.
Indeed, quantitative easing measures in countries around the world have spurred hot money to spread everywhere, driving up exchange rates in several countries, and causing raw material, commodity and other asset prices to climb.
For instance, international crude oil prices have over the past six months risen from US$41 to US$61 per barrel. Prices for soybeans and corn have increased by 50 percent over a 12-month period. Nickel, copper and tin prices have also soared about 50 to 60 percent, and prices for cotton and rubber have risen by more than 40 percent.
The IMF in January forecast that the global economy would grow 5.5 percent this year and 4.2 percent next year, following a projected contraction of 3.5 percent last year due to the COVID-19 pandemic. The forecast reflects the fund’s expectation that vaccine rollouts would spur economic activity this year, and a low base of comparison last year.
However, post-pandemic recovery, coupled with fiscal policy support in several countries, will put pressure on inflation. Given rises in supply chain costs and raw material prices in the past few months, many analysts are focusing on whether higher production prices will drive up consumer inflation.
As the world economy rebounds, rising prices are inevitable. In Taiwan, the consumer price index (CPI) rose 1.37 percent year-on-year last month, reversing from a 0.6 percent decline in January, the Directorate-General of Budget, Accounting and Statistics reported last week. The core CPI, which excludes volatile food and energy prices, advanced 1.63 percent last month. The agency forecast that the inflation gauge could increase further if energy and raw material prices continue to rise.
On a positive note, the CPI only increased 0.59 percent for the first two months of this year and is likely to increase 1.33 percent for the whole year, it said.
Despite expectations of rising inflation, the central bank and its global peers are unlikely to raise interest rates quickly during the post-pandemic era to avoid slowing economic recovery. However, the government should not allow inflation to grow out of control. Cost-push inflation due to rising energy and raw material prices is harder to deal with than demand-push inflation due to too much money being available for too few goods.
Investors should focus on the pace of the global economic recovery and the gradual tightening of monetary policies around the world, as stock markets have risen much and market volatility has intensified.
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