Government bond prices were falling on both sides of the Atlantic. When loan prices fall, their market interest rates rise.
For example, the market interest rate for the German ten-year bond was 3.9 interest points with an increase of 2.39 percent, and the market interest rate for the corresponding French loan was 4.5 interest points with an increase of 3.13 percent.
Germany’s two-year was up 6.6 basis points at 2.18 percent and France’s was 6.9 basis points at 2.39 percent.
The US ten-year was up 2.6 interest points at 4.47 percent and the two-year was at 4.30 percent at Friday’s closing readings.
Market rate (current yield): Describes the annual return. When the price of the loan paper decreases, the market interest rate rises, when the price of the loan paper increases, the market interest rate decreases.
Bond: An investor buys a 1,000 euro bond with an annual coupon rate of 2.0 percent. The market interest rate is (20/1000) 2.0 percent.
Example: The investor sells the loan to another investor for 1100 euros, which means the price goes up. The return level of the new investor is no longer 2.0 percent, because he bought the loan at a higher price, but receives the same coupon rate. The new market rate is (20/1100) approximately 1.8 percent.
Central banks: If interest rates are high, governments and companies offer higher coupon rates. If the interest rate falls, the coupon rates of older loans appear more attractive than loans issued with a lower coupon rate in the new interest rate environment. Inflation expectations have a big impact on long-term loans.
The Trump Effect
In the United States, market interest rates have risen Donald Trump’s after winning the elections in early November. He has talked about measures that could accelerate inflation, such as lower taxes and higher customs duties.
The central bank, the Fed, has long tried to curb inflation with high policy rates, but it has already started lowering interest rates when the rise in prices has shown signs of abating.
Last week the governor of the central bank Jerome Powell comments that there is no rush to lower interest rates. Nordic chief analyst of the market strategy team Niels Christensen according to several interest rate cuts have been priced out of next year after Trump’s election.
“In this situation, the Fed should not hurry further with interest rate cuts,” commented Christensen to the news agency for Reuters citing stronger-than-expected retail sales figures last week, driven by household purchases of motor vehicles and electronics.
This week, the focus is on who Trump plans to nominate as Treasury Secretary.
“I think we cannot exaggerate the importance of the choice of the finance minister”, Chief Strategist at Principal Asset Management Seema Shah commented the news agency Bloombergille.
According to him, the reactions are significantly more positive if the choice falls on a person who is at least a little skeptical about the new customs fees.
The central banker put the yen on a downward spiral
The Japanese yen weakened sharply against several currencies. For example, 0.38 percent in relation to the dollar and 0.61 percent in relation to the euro. In euros, you got 163.7 yen.
Governor of the Bank of Japan Kazuo Ueda commenting on monetary policy for the first time since the end of the US presidential election.
He warned about inflation driven by wage trends and too low interest rates and stated that interest rates will continue to rise if the economy develops in accordance with the central bank’s views.
Kazuo did not mention whether interest rates will be raised in December, but said that the bank should pay attention to various risks such as the US economy.
Source: www.arvopaperi.fi
