After engaging in large spending sprees, countries have found themselves in deeper levels of debt. The end result is that many bond and bond-related exchange traded fund (ETF) investors wait on the fate of monetary policies.
Any doubt over a country’s sovereign line of credit will likely put upward pressure on long-term bond yields in high-deficit countries, reports Richard Barley for The Wall Street Journal. The yield curve is the relationship between the interest rate and the time to maturity of the debt for a given borrower in a given currency, as stated in Wikipedia. [What the Yield Curve Says About ETFs.]
So far, the gap between the U.S. two- and 10-year bonds is still hovering around 2.8% – a 30-year high.
Countries like the United Kingdom and the United States, whose budget deficits are running at in the double-digits as a percentage of GDP, are being threatened with losing their triple-A credit ratings. Additionally, the eurozone may also need to consider deficit reduction or face increased funding costs. [How to Protect Yourself from the Deficit.]
Policy makers now have to decide if higher interest rates will impede growth. However, if they find out that increases in long-term interest rates reflected the government’s willingness to keep higher inflation to ease debt burdens then they would need to raise rates.