Global Bond Market Sees Hawkish Repricing and Flattening Yield Curves

The global government bond market has seen significant developments since June, particularly in Germany, Japan, the UK, and the US. One key driver of higher yields is the hawkish repricing of central bank expectations, which has led to short-term yields increasing outside of the US.

While the Fed is expected to be relatively cautious in tightening policy due to higher energy prices, other countries have seen more pronounced rises in short-term yields. For instance, Japan's 2-year JGB yield has risen by almost 50 basis points, contributing to a significant flattening of the Japanese yield curve.

Government bond curves in Germany and the UK have also flattened, although less so than in Japan. This suggests that long-term bonds are holding up relatively well despite the sell-off in European bond markets over the summer.

Natural gas prices have surged to their highest levels since the US-Iran conflict began, intensifying inflation concerns and leading to higher market-based measures of inflation expectations. However, real yields across major government bond markets have consolidated at higher levels after rising in Q2, reflecting the resilience of the global economy in the face of the energy price shock.