Bonds Grind Towards Higher Neutral Rates Amid Global Growth Surge

The global bond market is experiencing a significant shift as investors demand higher returns from governments, pricing in stronger growth and further central bank rate rises. U.S. Treasury yields have reached their highest since President Donald Trump returned to the White House early last year, while Japanese government bond yields have topped 3% for the first time since 1996.

Real, inflation-adjusted yields are also on the rise, with real U.S. 10-year rates jumping about 40 basis points in just three months and Japanese 10-year real rates almost trebling to 0.9% over the same period.

The shift towards higher neutral interest rates may not be bad news, but it will likely lift borrowing costs far and wide as central banks recalibrate policy for the AI-related investment boom.

Federal Reserve Chair Kevin Warsh acknowledged that current U.S. monetary policy shows little sign of bearing down on loan or credit growth, with financial conditions remaining loose. He emphasized that the central bank has 'work to do' unless inflation subsides significantly towards its 2% target.