Rising Bond Yields May Curb the Need for Further Rate Hikes, Analysts Say

what happened

Rising bond yields do not necessarily mean central banks will raise rates as much as markets now expect, T. Rowe Price's Ken Orchard says. He argues that if yields climb far enough to restrain economic activity, the need for further policy tightening could fall. He points to the Iran conflict and higher energy prices adding to inflation uncertainty, while large fiscal deficits and heavy government bond issuance keep pressure on markets.

Several analysts also looked at individual central banks. Capital Economics expects the Bank of Korea to deliver one more rate increase, most likely in November. ING expects the Bank of England to raise rates in November and February, and sees room for the euro to fall on concerns about French debt. ING's Carsten Brezski also thinks the ECB will likely hold rates at its meeting next week.

why it matters

For markets, the key point is that higher yields can tighten financial conditions on their own, even without new policy rate decisions. Gilts and the euro are being compared with French bonds, while US Treasury yields are tied to expectations for Federal Reserve rates.

market impact

Bonds and currencies: higher yields and French debt worries weigh on the euro and sterling

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