Why global bond markets are convulsing
Live MintAlmost everywhere, government-bond yields are rising fast. 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. Across theG10 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. This could be pushing up the “term premium"—the extra yield investors charge on long-term government bonds, over and above that attributable to the changes in the central bank’s policy rate that are already expected. The term premium compensates bondholders for the risk that bond prices fall sharply; say, if unexpected inflation forces central banks to aggressively raise rates.