Global Bond Markets Grind Towards Higher Neutral Interest Rates

Global bond markets are grinding towards higher neutral interest rates as investors demand higher returns from governments. This phenomenon is not limited to the US, but is a global trend.

In the US, yields on U.S. 10-year Treasury bonds have risen to their highest since President Donald Trump returned to office in early 2021. Japan's 10-year government bond yields have topped 3% for the first time since 1996, while Germany's 10-year Bund yields have hit a 15-year high.

The Federal Reserve Chair, Kevin Warsh, acknowledged at Jackson Hole last week that current US monetary policy is not bearing down on loan or credit growth. Unless inflation subsides towards its 2% target, the central bank has 'work to do', he said.

With real Fed policy rates still effectively zero and nominal policy rates at a midpoint of 3.625%, it appears that the neutral rate may be revised higher. The median of quarterly Fed policymaker forecasts for the long-term nominal policy rate is 3.1%, but this assessment can change materially.