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As central banks around the world raise interest rates near historic lows, the index used to measure growth in the bond market has issued an ominous warning.

Traders speculate that against the backdrop of soaring living costs and commodities in developed countries such as the UK, New Zealand, and South Korea, these countries will raise interest rates by up to 161 basis points next year.

For over a decade, the Federal Reserve has distorted the yield curve signal through bond purchases. However, as the yield curve indicator tends to align with other growth indicators, and stagflation becomes a hot topic on Wall Street, investors are starting to consider whether such rapid tightening would harm the nascent recovery.

The global head of foreign exchange strategy at Citigroup Group of 10 said, "The unexpected effects of slower economic growth may outweigh the unexpected effects of rising inflation, and then we will fall into a situation where central banks turn into hawks and have to turn into doves again within about a year

A weak currency

n the UK, the market is particularly concerned about currency weakness. Although the UK is struggling to cope with the severe economic impact of Brexit and the rebound of COVID-19 in winter, traders predict that the Bank of England will raise interest rates by more than 100 basis points by the end of 2022, which will become the most radical interest rate raising cycle in this century.

Market concerns have had an impact on the trend of the pound, which fell to its lowest level this year in September. Although the UK economy has started to recover, traders are still trying to figure out what rate hikes mean for economic growth and the pound.

In the past six months, the Korean won has been one of the worst performing currencies in Asia, and the Bank of Korea's interest rate hike has failed to boost the Korean won exchange rate. A similar situation exists in New Zealand, where the New Zealand dollar actually fell after the New Zealand Federal Reserve raised interest rates last month. Since then, although the New Zealand dollar has rebounded slightly, the trend of steady decline has not changed, as the market expects the New Zealand Federal Reserve to remain neutral.

Analysts said, "Considering that other countries' central banks may follow up with interest rate hikes, the upward space for the New Zealand dollar should be limited

The same situation is also happening in emerging markets, where currencies are already at their lowest level since March 2020, relative to the local average bond yield. This phenomenon indicates that investors believe that the attractiveness of rising interest rates is disappearing and are hedging against a global slowdown in growth and accelerated inflation.

Is it appropriate to raise interest rates now?

The question of whether an economy is strong enough and how much borrowing costs it can bear still leaves the market at a loss. If energy costs decrease and supply chain issues ease, will inflation fall below the Federal Reserve's target? If it really falls, it may prompt the interest rate hike to end as soon as possible. A professional said, "The actions of central banks in various countries are already ahead of schedule, and the signal sent by the market is that it is still too early to raise interest rates