Global Bond Yields Surge as Central Banks Weigh Rate Hikes

The recent surge in bond yields has sparked debate about how central banks should respond. While some argue that markets are doing the tightening work, others believe that central banks need to raise interest rates to combat inflation risks.

Catherine Mann, a BoE voter, is among those advocating for rate hikes, saying 'tighter financial conditions (from higher bond yields) are no comfort when they reflect higher inflation risk premium.'

However, the situation in France is more nuanced. The country's 10-year yields have jumped 100 bps since early August amid mounting fiscal concerns, and the spread with German yields has surged above 120 bps.

The ECB must consider the entire region's economic outlook when making decisions, and the major data point in Europe this week was a nasty 0.6% m/m rise in September CPI, cranking the annual inflation rate six ticks to 3.8%. The ECB has already lifted rates by 50 bps this year to 2.50%, and is expected to hike again by year-end.

The sharp back-up in global yields is also causing problems for other regions, particularly Europe, where growth is struggling to keep pace with higher rates. In contrast, the U.S. economy has been resilient, despite some inflation pressures, and its underlying inflation rate is driven more by solid economic growth and borrowing from mega tech companies.

The BoC rate expectations were dialed back this week, making a hike in October unlikely, and Canada's fiscal sustainability is much less of an issue than for others, with 10-year yields below 4%.