The global monetary policy tightening cycle

Global bond markets have moved significantly over the last two weeks as some central banks started hiking rates. Our charts this week show the effect on yields.

By 
Julius Probst, PhD
 on 
November 5, 2021

Global bond markets have moved significantly over the last two weeks, especially as some central banks started hiking rates much sooner than anticipated, and more aggressively in the face of rising inflation and growing aggregate demand. In fact, some advanced economy central banks have turned quite hawkish just in the last couple of months.


As the following heatmap shows, yields surged across many advanced economies this week and last, with yields in Australia, Italy and Poland rising 20 basis points (bps) in a single day.

Macrobond users, access the chart here


The Reserve Bank of Australia abandoned its yield curve control (YCC) as it became clear that asset purchases would have to be extreme to defend the peg to the US dollar. As a result, the two-year yield surged from about 0.1% to more than 0.5% in just two days.


Macrobond users, access the chart here

As the chart below shows, the 30bps surge corresponded to a 4-sigma move, in other words, more than four standard deviations above the mean. The last time such a massive rate change happened in Australia within a day was almost a decade ago.


Macrobond users, access the chart here

With rising inflation rates and surging aggregate demand as advanced economies recover from the pandemic, nominal rates are now rapidly increasing, too. In the case of Australia and New Zealand, the entire yield curve has shifted up within two weeks, especially at the front end in the case of Australia.


Macrobond users, access the chart here

Central banks in Eastern Europe have been extremely hawkish too, not surprising in the case of Poland, where the year-on-year inflation rate is approaching 7% - far above the upper limit of its inflation target. The policy interest rate was first hiked from 10bps to 50bps in October, now followed by another 75bps increase.

Macrobond users, access the chart here


The Czech central bank has been even more hawkish. It had hiked the policy rate from 0.25% in June to 1.5% in October and by another 125 basis points this week. Further, appreciation of the Czech currency will put some downward pressure on inflation, which is approaching 5%. 

Macrobond users, access the chart here

However, those worried about stagnation probably shouldn’t. The graph below plots the OECD’s forecasts for inflation and real GDP growth for 2022. While inflation rates are expected to be higher than at any time post-2008 in most countries, they are far lower than what advanced economies experienced in the 1970s. Moreover, real growth rates are expected to be quite high for next year, absent major revisions. Not so much stagnation rather than an economic boom with higher inflation!

Macrobond users, access the chart here

Finally, here’s a graph from our new FactSet/Macrobond Equity Factor Aggregates, a new premium database. You can see that earnings estimate revisions have slowed across several countries and even turned negative for Australia, potentially pointing towards an equity market correction. 

Macrobond users, access the chart here