Bond Market Delivers Verdict on Inflation as Fed Stays Silent

Sovereign bond yields have surged in recent days across major economies, including the United States, Japan, the UK, and the Eurozone. This increase is unusual because it's happening despite slowing global economic growth.

Normally, weaker growth would lead to lower long-term interest rates. However, investors are focused on rising inflation, expanding fiscal deficits, growing government debt, and central banks struggling to keep up with events.

The bond market is sending a clear message: major central banks, including the Federal Reserve, are no longer leading investors through policy pronouncements or decisive actions. Instead, they're reacting to market pressures that have already reached their own conclusions.

In the US, Federal Reserve Chairman Kevin Warsh has acknowledged high inflation but failed to provide a framework for bringing it down. As a result, investors are setting interest rates that truly matter, those on 10-year and 30-year Treasurys, with yields climbing to 4.71% and 5.17%, respectively.

The main drivers of the bond market's verdict include the escalating war with Iran, which is driving up oil prices, and the Trump administration's tariff war, particularly its new tariffs on Canadian goods. The combination of higher energy costs and additional levies threatens to reverse recent moderation in inflation.