Bringing inflation to heel without triggering recession is getting harder. Bond markets are starting to price in the risks.
The rise in yields across global bond markets last quarter brought home a reality that many had long suspected. Namely, that letting just enough air out of the world economy to reduce inflation without triggering recession is a difficult and drawn-out process.
In the US and Europe the measure is still more than twice the central banks’ 2% target. In the UK it is more than three times. Central bankers may not raise rates much further, but they are still a long way from cutting them.
The ‘higher for longer’ mantra for rates has been repeated by the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) over the past two months. The bond markets appear to be listening. Ten-year US treasury yields climbed more than 0.7% over the third quarter to 4.5% (the highest since 2007), while in the eurozone yields rose by about 0.45%.