In what could be the first sign that central banks are becoming uncomfortable with the recent increase in yields, yesterday ECB President Christine Lagarde fired a bond yield warning shot across the bows saying that her organization was ‘closely monitoring’ government bond markets, worried that recent moves might undermine any economic recovery. Speaking at a European Parliament event, Lagarde said ‘Sovereign yields are particularly important. Banks use those yields as a reference when setting the price of their loans to households and firms’ adding ‘Accordingly, the ECB is closely monitoring the evolution of longer-term nominal bond yields’.
We also had François Villeroy de Galhau a European Central Bank (ECB) Governing Council member, telling reporters that the euro zone economy had no risk of overheating and no risk of a lasting pick up in inflation. He said that the ECB will continue to ‘monitor’ borrowing costs, adding ‘Financing conditions remain very favourable, we’ll see to it that stays that way’.
Later today we have Jerome Powell’s appearance before Congress. He is to address both Senate and the House panels on successive days as part of mandated semi-annual updates on monetary policy, with the reflation trade and rising bond yields at the forefront of investors mind. He is going to have to walk a tightrope, for while there is likely to be a near-term rise in inflation, mainly fuelled by commodity prices, the US still has very high unemployment as well as a lot of ‘slack’ in the economy, meaning longer term increased inflation will not persist.