There is a lot more than meets the eye to the continuing sharp spike in sovereign bond yields around the world. The causes go much beyond rising inflation or inflation expectations.
The roots of what looks to be an impending bond market crisis can be traced indirectly to the inordinate burden now being placed upon governments to bear the financial cost of wars, rising social security, energy and healthcare costs, as well as escalating debt servicing and other levies.
These concerns are prodding markets towards a growing acceptance that all is far from well with the global economy, and that the balance between public and private financing is out of kilter. How else to explain the contradiction between euphoric stock markets and falling bond prices?
Inflation certainly is rising in the wake of the US-Israel invasion of Iran, the consequent closure of the Strait of Hormuz, and the impact on oil and other material costs. And borrowing costs are rising as central banks move to tighten monetary policy in order to curb inflation expectations.
But none of these factors are sufficient in themselves to account for the seemingly relentless rise in bond yields. Even collectively, they fail to offer a convincing explanation for the spreading malaise in bond markets.
Benchmark ten-year government bond yields are touching highs almost everywhere, even in advanced economies such as the US, the UK, much of Europe and Japan where markets would normally expect more conservative fiscal policies than in, say, Asian, Latin American and other emerging markets.
This points to a nervous and widespread investor base, one that demands higher returns as the price for providing continued rollover financing, even from highly rated sovereign borrowers and blue chip creditors.
Why now, apart from the rather naive assumption on the part of some commentators that, with a perceived end to the US-Iran war in sight and reopening of the Hormuz waterway, all could soon become right with the world again?
This is wishful thinking because even if the war were to be resolved soon, damage to oil production facilities and energy transport infrastructure will likely take until the end of the year to be fully rectified.
The bottom line is that bond markets are signalling a more fully cognisant and mature appreciation of the state of government finances and of global financial markets in general than are equity markets, whose heads are firmly in the clouds.
