The recent bond market sell-off has sparked debate over its primary driver. While some attribute it to rising inflation expectations, others point to improving global growth. Break-even inflation rates—derived from comparing conventional and inflation-protected bonds—have remained stable around 2.4%, suggesting inflation is not the main culprit.
Instead, real yields have climbed, reflecting stronger growth outlooks. However, Morgan Stanley argues a newly hawkish Federal Reserve is the key force. A hawkish Fed pushes real yields up while lowering break-even rates, while higher energy prices push break-evens up.
This year’s combination—hawkish Fed and rising energy prices—explains why break-evens stayed flat while real yields surged. The Fed’s tighter rate path in response to inflation has reshaped market dynamics, mirroring patterns seen in 2022.
Source: Financial Times Markets · Summarized by HeadlinesBriefing