Bond market rout raises long-term inflation fears

A sharp sell-off in global government bonds is exposing investor anxiety that the macroeconomic backdrop may be shifting toward persistently higher inflation, as governments struggle to rein in spending and sovereign debt.

Pressure on yields is not just a factor of this year’s rise in government borrowing and higher energy prices. Investors highlight a pivot away from globalization toward protectionism, and geopolitical tensions, which have materialized in trade tariffs, industrial reshoring and increased defense spending, as signs of a broader shift that could keep inflation structurally higher.

That would mark a decisive break from the generally low and comparatively stable inflation environment that followed the global financial crisis — heralding wide-ranging implications for investors’ portfolios.

“Structural features of the global economy have shifted and now create inflationary, rather than disinflationary impulses,” said Emma Moriarty, portfolio manager at CG Asset Management.

“Tariffs, and then more recently, the outbreak of war in the Middle East have been the sharp end of this changing order. It is wrong to think of the energy shock as temporary, as the underlying structural change that has caused it might be quite long-lived.”

The U.S. 10-year Treasury yield climbed to its highest level since November 2023 this week, while Japan’s 10-year government bond yield moved above 3% for the first time since 1996. In the U.K., yields on 10-year Gilts — the benchmark for Britain’s government debt — hit a post-2008 high, as German 10-year bund yields, a barometer for euro zone borrowing, rose to levels not seen since 2011.

Longer-dated yields in those countries also touched multi-year or multi-decade highs.

Jon Cunliffe, head of investment office at JM Finn, said that while cyclical inflation pressures may continue to moderate, investors should not assume a return to the persistently low and stable inflation regime that prevailed between 2010 and 2020. 

“The key unknown is the extent to which AI will exert a disinflationary pull via a significant boost to productivity — this is certainly what new Fed Chair [Kevin] Warsh is hoping for as U.S. policymakers wrestle with growing fiscal dominance,” Cunliffe told CNBC via email.

Investors say this week’s yield spike, particularly at the longer end of the curve, underlines investor demands for a higher term premium in the face of greater fiscal borrowing requirements, persistent inflation uncertainty and reduced central bank support for government debt in some major economies.

Speaking with CNBC on Wednesday, Haig Bathgate, CEO at Callanish Capital said that while this week’s sell-off reflects a degree of short-term noise, sustained inflation across the term structure is “going to be a feature going forward in markets”.

 “At some point, this is going…