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Banking turmoil creates uncertain outlook for bond yields

April 18, 2023

Banking turmoil creates uncertain outlook for bond yields
Turmoil across the banking sector, sparked by the collapse of Silicon Valley Bank, has ignited fresh doubts among investors over the outlook for interest rates and bond yields at a time when inflationary pressures globally remain uncomfortably high.

Central banks on both sides of the Atlantic have repeatedly emphasised their determination to bring runaway inflation under control. But additional hikes in interest rates could create more instability across the banking sector and increase the risk of pushing economies into recession.
 
At the start of April, financial markets were pricing in a 50 per cent chance of a 25 basis point increase in US rates in May, followed by a decline to around 3 per cent by the end of next year.
 
However, Jim Cielinski, global head of fixed income at asset manager Janus Henderson, expects the Federal Reserve to hold rates at their peak level for longer than the market is currently factoring in, because of policymakers’ failure to achieve their main task: ensuring price stability.
 
“The notion that US rates can be cut at the first sign of trouble, and that central banks will do more quantitative easing if conditions get tough that era is over,” says Cielinski.
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