Higher-than-expected inflation rates, the prospect of an acceleration in economic growth after the pandemic is over and central banks warming up to fight currency devaluation are driving higher yields in bond markets around the world.
The volume of bonds with negative nominal yields has fallen significantly since the beginning of the year from 14 to 6 trillion dollars.
This trend can also be seen in the euro zone: German Bunds with medium and long remaining terms are now showing positive yields again.
At the same time, the prospect of a gradual departure from what had been a very expansive monetary policy for a long time is creating textbook-style larger yield differentials between bonds with very good credit ratings and bonds with weaker credit ratings.
While bonds with a very good credit rating remain in demand as a safe investment, holders of bonds with a weaker credit rating want a stronger increase in yield as a risk premium.
This effect can also be observed in the euro zone: the gap between ten-year Italian and German government bonds has reached its highest level since summer 2020 at around 1.60 percentage points.
Anxious minds are already seeing the next European debt crisis coming and would like the European Central Bank to limit yield spreads.
Deviations so far small
So far, however, the market reactions have not been extreme.
Even after their most recent increase, government bond yields are still well below the rate of inflation.
Your real rate of return, adjusted for inflation, therefore remains negative.
And the differences between bonds of different credit rating classes are still too small rather than too large.
Even if comparisons between bonds denominated in different currencies are a bit fuzzy, it is worth looking at transatlantic yield spreads: Italian 10-year euro-denominated government bonds still yield lower at 1.80 percent than US dollar-denominated 10-year bonds at 1.95 percent.
But while American government bonds are still considered the leading safe investment on the global securities markets, it has not been possible in recent years to place Italian government bonds with private investors on a permanent basis.
The direct consequences of higher yields for Italian public finances remain insignificant for the time being.
Even a further increase will not lead to a noticeable additional burden on the budget in the foreseeable future.
The average interest rate on government bonds in circulation is 2.3 percent.
Even if Italy had to offer interest rates in excess of 2.3 percent for new bonds in the future (which is currently not the case), it would take a long time for the government's interest expenditure to increase noticeably.
Inflation probably not temporary
However, these calculations presuppose that Italy succeeds in refinancing maturing old bonds as well as ongoing new borrowing by issuing more and more new bonds.
This is where the problem lurks, because since the beginning of the pandemic, the ECB has not only financed all of Italy's new debt, but has also taken over older bonds from private investors' portfolios.
However, if the ECB abandons its expansive monetary policy as a result of inflation, it will no longer be able to secure the financing of Rome's national debt.
Then Italy will have to woo private investors again – with possibly even higher bond yields, a solid financial policy and an economic policy geared towards productivity and growth.
The desperate attempts of some economists, which can also be observed in Germany, to downplay the dangers of inflation, to answer unpleasant facts with moralizing outrage and to try to prevent the ECB from normalizing its monetary policy, which is overdue, should be seen against this background.
Because their dream of a world characterized by even more government, in which highly indebted countries also increase deficits for more public investment and central banks flank this policy with low interest rates and bond purchases, is shattered under the blows of unexpectedly strong and presumably not only temporary inflation.