Reports of rising inflation are everywhere, and the bond market is paying attention.
As evidence, we turn to Exhibit A–the 10-year Treasury yield, which closed above 4% for the first time since December 31, 2007. Rising yields are present in other maturities, too, including the 2-year Note, which yesterday settled at 2.62%, the highest since this past January.
It’s not hard to guess what’s behind the pop in yields: inflation fears, the bond market’s worst enemy. Securities with fixed coupon payments are the first to suffer in a world of higher inflation.
As The Economist points out this week, inflation is bubbling around the world, particularly in the emerging market countries. What does that mean for U.S., Europe and the rest of the developed world? Food, energy and raw materials prices will “remain high,” the magazine predicts: “In other words this is a permanent relative-price shock, not a temporary one. Yet this does not mean that commodity prices will keep rising at their current pace. Higher prices will encourage increased supply. And even if prices remain at today’s levels, the 12-month rate of increase will decline, helping to ease global inflation.”