Why global bond markets are convulsing

Almost everywhere, government-bond yields are rising fast.

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Those on ten-year American Treasury bonds are almost 5%. German bunds now offer 2.6%, up from close to 2% in December. Japanese bond yields are climbing. Things are particularly extreme in Britain, where gilt yields recently reached almost 5%, their highest since 2008. Rising yields are bad news for governments, which must pay more to service debts. They are also painful for all sorts of other borrowers, including many mortgage-holders, whose bills ultimately depend on governments' borrowing costs.

What is going on? Central bankers across the rich world have cut rates—yet the real economy is seeing little or no relief. The borrowing costs facing businesses and households have barely budged. In the euro area the interest rate on new business loans has fallen by less than a percentage point. A British consumer looking to borrow £10,000 ($12,200) pays an average rate of 6.75%, just short of a recent peak. And in America the rate on a 30-year fixed-rate mortgage is close to 7%, having risen by a percentage point over the past few months. The situation marks a profound change from before and during the covid-19 pandemic, when bond yields were heading to all-time lows.

Inflation is part of the explanation. In a world where consumer prices are rising quickly, investors demand higher bond yields both because they expect central banks' policy rates to stay higher for longer, and to compensate for the anticipated erosion of the principal's purchasing power. Recent data hint that inflation will fall more slowly than once hoped.

Across the G10 nominal wages are still increasing at 4.5% a year, which is probably enough to push inflation above central banks' targets given weak productivity growth. In the euro area there are signs that wage growth is actually heating up; in America a blowout jobs report, published on January 10th, suggests the economy is far from slowing.