Kerry Craig

Macroscope | Why are bond yields so low when economic recovery indicators are positive?

Part of the reason could be fundamental worries about what lies ahead, in particular the spread of the Covid-19 Delta variant and its effects on reopening

The dampeners on government bond yields will fade over time, and ultimately the strong prospects for brighter economic growth should send yields higher

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Chairs are piled up on tables at a closed restaurant near the Sydney Opera House on July 6 during a lockdown to contain an outbreak of the highly contagious Covid-19 Delta variant in Australia. Photo: AFP

Kerry Craig

Published: 2:30pm, 23 Jul 2021Updated: 2:30pm, 23 Jul 2021

There is a popular theory among investors that bond markets are sensitive barometers – moves in government bonds are a gauge of market sentiment. The wise bond market is supposed to be rational but, lately, it has sent some perplexing signals.

Bond yields have fallen in the past few weeks, which means bond prices have risen, as they move inversely. The steady increase in demand for bonds created confusion for markets as it suggested that investors were buying safe assets like US Treasury bonds and adopting a pessimistic view of the future.

The seemingly dour sign from the bond market was directly at odds with the rising levels of inflation and above-trend economic growth in many parts of the world, leaving market-watchers scratching their heads.

While it is difficult to pin down a single reason to explain the lower bond yields, there are several dynamics that could be provoking such seemingly bizarre market behaviour. Part of the reason could be fundamental worries about what lies ahead.

The big risk on the horizon is that the Covid-19 Delta variant and rising case numbers will short-circuit economic recovery. Stricter mobility restrictions in parts of the developed world could constrain reopening, and some emerging markets continue to struggle with managing the pandemic.

07:07

The global spread of the highly contagious Delta variant of Covid-19

Achieving a sufficiently high vaccination rate has always been key to breaking the link with economic activity. Vaccine hesitancy and supply issues have hampered roll-out programmes, though, and new virus mutations have raised questions over vaccine efficacy.