Leading Indicators | Higher for longer? The global government bond sell off
Discover key economic and financial metrics, and what to look out for in the week ahead.
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Global bond sell off
Fuelled by expectations that interest rates will remain higher for longer, particularly in the US, there has been a global sell off in government bonds.
US and UK 30-year government bond yields hit 5+% last week for the first time since 2007 and 1998, respectively. Long dated German bund yields reached levels last seen in the run up to the 2011 eurozone debt crisis, while Italy’s 10-year bonds hit 5% last week, the highest level since 2012, when the crisis was underway.
However, for the UK, the speed of the rise in long dated gilts (+44bps over 10 days) is slower than during the run up to the liability-driven investment (LDI) crisis following last year’s ‘mini-budget’ (+155bps over seven days). While another LDI crisis is unlikely, the cost of debt in the UK has risen in response to the bond sell off. The 5-year SONIA swap rate is currently 4.56%, which compares to the recent four month low of 4.44% at the end of September. Elevated financing costs could provide opportunities for investors less reliant on debt.
Opportunities remain, despite headwinds
Given higher interest rates and the elevated cost of debt, we have seen a global moderation in CRE investment in 2023. However, with a thinner pool of capital, comes opportunity. Our latest Active Capital research suggests that high-net-worth investors and Sovereign Wealth Funds, typically less reliant on leverage, are using this pause to acquire ‘once in a generation’ safe haven, trophy assets with less competition. Investors in countries with relative currency strength, such as North America and Singapore, will likely continue to be active internationally. For example, we are seeing an increase in Japanese investors, across all investor types, as they take advantage of significantly lower domestic swap rates. Indeed, provisional numbers suggest global cross border investment from Japan has totalled $6.6bn between Q1 – Q3 2023, a new annual record and up +145% y/y. CRE in the US ($2.4bn), Australia ($1.4bn), Canada ($1.1bn) and the UK ($748m) have been the main targets for Japanese investors in 2023 YTD.
Trade slowdown ahead?
The World Trade Organisation (WTO) halved its estimates for global export growth to +0.8% in 2023, down from +1.7%, last forecast in April. Rising geopolitical tensions were behind the downgrade, however, the WTO chief economist stated that broad deglobalisation “was not here yet”. This aligns with Brent Crude rising to an 11-month high of over $95 per barrel last week. Our view is that the changing global geopolitical landscape, combined with a desire for more sustainable supply chains, has increased the appetite for onshoring, which is helping to fuel demand for warehousing space.
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