With the 10-year Treasury yield breaching 2% after this week’s higher-than-expected U.S. inflation numbers, bond traders are rightly feeling bruised and battered. The bad news is, there’s probably more pain in store in the fixed-income market. But the good news is that governments and companies are still able to benefit from borrowing costs that are way below their historical levels.
Around the world, consumer prices have been accelerating at a pace that is anything but transitory. January’s 7.5% climb in U.S. inflation was faster than the 7.3% anticipated by economists. In the euro zone, the record 5.1% print has prompted the European Central Bank to drop its commitment not to raise interest rates this year. And surging consumer prices in the U.K. have prompted the Bank of England to increase its official rate at its previous two meetings.
In the fixed income markets, traders and investors have recalibrated their expectations for how high yields need to be to accommodate the changing environment. The 10-year U.S. government bond yield has doubled since the start of last year, reaching its highest level since August 2019. The consensus forecast among analysts surveyed by Bloomberg News is that the benchmark will continue to head higher in the coming months.
That market reaction is echoed around the world. Global bonds, as measured by the Bloomberg Global Aggregate Index of more than $60 trillion of investment-grade debt, have lost value for six consecutive months. Their total return in January was -3.51%, the worst outcome since the start of the pandemic.
