Does the development of long-term bonds indicate longer-term risks? Inflation risks, for example?

Commodity price inflation keeps shifting the focus to different product groups. These include metals, oil and gas, precious metals, certain agricultural products and fertilisers. For example, inflation over the past 15 years has left its mark on agricultural products, and anyone who shops regularly can feel it in their wallet. The index consists of the Deutsche Bank Agricultural Goods Index, which tracks the price of cocoa, coffee, sugar, soybeans, meat, wheat and grains via futures contracts. The index shows a clear trend. However, government statisticians find ways to hide this trend. Nevertheless, the trend clearly points to inflationary developments.

In the US, debt is growing steadily and relentlessly. Interest payments on government bonds now consume 25% of tax revenues. To cover this deficit, more and more bond buyers have to be found. After all, it is not only new debt that needs to be financed but also maturing bonds. Under Janet Yellen, the Treasury started issuing more short-term debt because it is easier to find buyers for it. Her successor, Scott Bessent, has already announced a return to more long-dated issuance. This could put further pressure on long-term rates.

The COVID-related collapse in the oil price was followed by an initial recovery to over USD 120 per barrel, but this was followed by a period of consolidation. This phase may be coming to an end soon, leading to a renewed rise in prices. What could be the reasons for this?

OPEC (the Organisation of the Petroleum Exporting Countries) still has spare capacity, but so far it has been very disciplined. Despite the talk of an ‘oversupply’, the fact is that global oil inventories are at their lowest level in five years.

One reason that no one is talking about is that unconventional (shale) oil production in the US seems to have peaked. And it was precisely this production that led to lower oil prices ten to twelve years ago. From 2007 to 2014, the oil price was above USD 100 per barrel most of the time. US oil production has risen almost inexorably, and there are still voices predicting further growth. In particular, the new president, Donald Trump, wants to produce an additional 3 million barrels of oil per day.  But US oil producers are having to resort to second- and third-rate fields to maintain production. However, this means higher costs per barrel and a faster decline in oil production after drilling. At a time when the cost per barrel of oil is rising, few US producers will be willing to increase production. In any case, a higher oil price is a stronger argument for increasing production where possible.

The US was at a similar point, and once before a president, Richard Nixon, had called for an increase in oil production. That was in 1970. Over the next ten years, until 1980, US oil production fell dramatically despite a sharp increase in drilling activity. Once the best locations are exhausted, the slow decline in production is irreversible.

In the 1970s, interest rates rose steadily as commodity prices rose. There is much to suggest that we are approaching a similar scenario.

In the US, the price of gas is currently around USD 4 per mbtu (million British thermal units), in Europe it is USD 13 and in Asia USD 14. Two developments are underway that will have a significant impact on the price in the future, at least in the US: on the one hand, production is stagnating, and some regions appear to have peaked; on the other hand, export capacity is steadily increasing due to gas liquefaction plants. In addition, artificial intelligence is a big consumer of electricity, and gas-fired power plants can be built quickly. We are also seeing a re-industrialisation of the US, which is benefiting from cheap energy and which President Trump wants to encourage. And here is the crux of the matter: higher domestic consumption and higher exports without an increase in domestic production will have an impact. The price of natural gas will converge with the world price, leading to higher energy prices in the US. The US, currently the largest exporter, may have to adjust its export share. The question is: will Russia step in again?

Germany is already in recession, while the US private sector is faltering. Government action is keeping growth and employment high, keeping the balance.

Defaults on car loans and credit cards have reached 2008 levels, indicating a deterioration in the personal circumstances of many individuals. Banks are estimated to have more than USD 350 billion of unpaid commercial real estate loans on their books, the prices of which have fallen sharply. The private sector is faltering, and further interest rate cuts would be appropriate. The Federal Reserve and the European Central Bank face a dilemma. The private sector and the labour market are calling for lower interest rates, while inflationary trends are calling for higher interest rates. But what will the central banks decide?

In the 1940s, the US Federal Reserve was forced to control the yield curve due to the high level of debt resulting from the Second World War and high inflation. By keeping interest rates below the rate of inflation, the national debt was gradually reduced. Even today, debt levels remain very high. The US Federal Reserve could take similar action.

However, it is clear that they do not have many other options.