Bond Yields Spike Amid Inflation, Fiscal Pressures

The recent surge in long-term bond yields can be attributed to two primary drivers: inflation and the fiscal deficit. According to experts, anything else that may impact these factors is only relevant if it ultimately affects inflation or the supply of bonds.

In their analysis, ING notes that a 4.5% yield for the US 10-year bond is considered 'normal', while the current rate of around 4.8% is roughly 30 basis points above this threshold. The same applies to the eurozone's 10-year yields, which are running at around 3.3%, slightly above their normal level of 3%.

However, a closer examination reveals that higher real yields have been driving nominal yields in recent months, suggesting that pressure on long rates may not be inflation-dominated. Instead, it is likely influenced by issuance pressures and the positive productivity growth associated with the AI revolution, as mentioned by Fed Chair Warsh.