Stock markets have performed particularly well since the start of the year in anticipation of a continuing rapid economic recovery. During his first months of office, the newly elected US President has dealt with many issues very effectively. The federal government has ramped up its vaccination programme and the desperately needed economic stimulus package worth $1.9 trillion has passed smoothly through both chambers of Congress. US households will now receive further hand-outs from the government and are likely to fuel the economic recovery with increased consumer spending. Another massive infrastructure package is already in preparation and should be presented to Congress for approval over the course of this year.

The massive spike in coronavirus infection rates, especially in Europe, is now forcing governments to tighten restrictions, however, and is souring the public mood. The opening-up of the tourist and hospitality industry in particular has had to be pushed back even further. This news seems to have barely affected financial markets so far, as central banks continue to pump massive amounts of liquidity into the economy in an attempt to keep short-term interest rates artificially low.

The rapid increase in public borrowing is now creating a situation where the cost of debt servicing accounts for an even higher proportion of government spending. You do not need to be a qualified accountant to see that highly indebted countries will barely be able to afford higher interest rates without eventually going bankrupt. Long-term yields on US Treasuries have risen sharply in recent weeks. The financial press and central banks blame rising inflation expectations as the main cause. But could it not also be the case that investors are demanding significantly higher yields on government bonds to compensate for the steady worsening of credit ratings?