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.
The markets are still split on the world’s timing of monetary tightening. Some believe rates will increase this year while others argue that Central Banks will hold off till 2011.
For more information on bonds, visit our bond category.
- iShares Lehman 7-10 Year Treasury Bond Fund ETF (NYSEArca: IEF)
- iShares Lehman 1-3 Year Treasury Bond Fund ETF (SHY)
- PIMCO 1-3 Year U.S. Treasury Index (NYSEArca: TUZ)
Max Chen contributed to this article.