· Post-Global financial crisis in 2008, Central banks have kept interest rates low whereas
Governments have borrowed more to pump prime the economy.
· This, in turn, has led to huge liquidity that has created multiple financial and real estate
bubbles across the world. Pricking these bubbles might slowdown the growth (as seen in
Japan in 1980s, which led to collapse of Japanese economy).
Increasing Yield Rate
· Investors are expecting inflationary trend – as consumer demand is expected to rise as
people are getting vaccinated (consumer demand collapsed due to COVID).
· However, supply will not be able to keep up with this increasing demand, thereby leading
to Demand-driven Inflation.
· Expecting this, investors are not content with the low interest rates being paid on
Government bonds, hence are selling these bonds.
o Increased availability of Government bonds has reduced its pricing – thereby pushing
up the yield rate and in turn the interest rates prevailing in the economy.
· Increasing interest rates tend to spook the stock markets, as investors will switch to less
risks bank deposits which offer a fixed rate of interest than the stocks.
· Higher interest rates also make borrowing and spending money less attractive as well as
increase the cost of borrowings of customers of banks.
· Overall, it will impact future earnings of the
economy on whole.
Reaction to this Expectation
· Governments have signalled that expansionary
monetary and fiscal policy are ought to
continue for the economy to recover.
· However, investors are trying to hedge against
inflation by buying hard assets in derivative
form – Bloomberg commodity index has seen a
rise of 9.25%.
· This hedging further augments price rise of
commodity, leading to higher inflation.
