To many observers, the rise in world bond-market yields reflects excessive inflationary fears. But economist Michael R. Rosenberg of Merrill Lynch & Co. argues that global bond markets, which have become increasingly integrated, are reacting to a new set of risks stemming from stronger world economic growth than anticipated only a few months ago.
Both the surge in commodity prices and the growing signs of recovery in Europe and Japan support this thesis. And so does a relatively precise measure of real interest rates: movements in Canadian and British inflation-indexed government bonds. Real returns provided by such bonds, notes Rosenberg, have moved higher this year, suggesting that almost half of the 250 basis-point rise in global bond yields this year reflects an upward adjustment in real rates.
The markets, concludes Rosenberg, "are saying that an accelerating global expansion will produce both higher rates of return for business and a pickup in inflation over the year ahead."