The enduring financial market story of 2026 is the rise in long-term government borrowing costs. The median rise in 10-year sovereign yields in G7 countries has been one percentage point, causing a nasty shock for finance ministers. The big question is why yields have risen so much.
Is it because investors want more compensation for perceived fiscal unsustainability? Does it reflect expectations of much faster growth? Is there a global war for investment funds and limited lenders? Has the Iran war raised the prospect of continued high inflation? Is it that central banks signalled the need for persistently higher short-term interest rates and markets are parroting this back? Have monetary policymakers lost inflation-fighting credibility? Or are bond markets now dominated by flighty hedge funds that can make huge returns if they get a negative narrative to stick? Everyone has their own answers. Federal Reserve chair Kevin Warsh said there were three broad reasons at a press conference in September: US economic strength, competition for capital and difficult geopolitics. The more important thing he said, however, was that explanations for changes in bond yields “tend to be overdetermined”.
In other words, there are many competing but unprovable theories. And he is right. For example, you might argue that expectations of short-term interest rates have changed.
But these measures are horribly volatile and often wrong, as the chart below shows. Or perhaps investors need more compensation for holding long-term debt (a rising term premium). But again, term premiums cannot be measured with any precision.
The New York and San Francisco Feds both estimate the term premium on a daily basis using different methods to wildly different results. The New York Fed tends to report that the US 10-year term premium has decreased this year, while the San Francisco Fed says it has increased, as the chart below shows. Warsh is right to talk only in broad terms about what bond markets are telling us.
So what can we confidently say? Central banks have broadly maintained inflation-fighting credibility. The difference between the yield on nominal and inflation-linked bonds provides an estimate of market inflation expectations. Ignoring the fact that inflation-linked bond markets are thin in some countries, break-even inflation expectations derived from this decomposition give an encouraging result for central banks: their inflation-fighting credibility remains intact.
The red line in the chart below shows longer-term market inflation expectations for the five-year period from five years ahead (that is, from 2031 to 2036). These have broadly been stable and close to target in most countries. The UK stands out here mainly because of a difference between the inflation measure used to uprate gilts and the inflation measure the Bank of England targets.
Rich-world five-year five-year forward market inflation expectations have been volatile this year thanks to the war in Iran. But higher UK rates suggest the BoE should probably be concerned that it appears to have less credibility than other central banks. To keep inflation controlled, central banks are expected to set higher interest rates.
来源: Financial Times Markets · 由HeadlinesBriefing整理摘要