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How Inflation Fears Drove a Historic Global Bond Rout

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The bond market in the US and other rich countries has long been boringly predictable, with prices by and large going steadily up and volatility far milder than in the more-talked-about stock market. The inflation that set in as economies rebounded from their pandemic collapse changed all that, leading global bond prices to fall by the most in at least three decades. The rout is forcing a rethink of frameworks that have long governed investments in the $100 trillion field.

For two reasons. A bond is a contract laying out a series of fixed payments over time. The right to collect those payments is less valuable if inflation is expected to erode their purchasing power. The other reason has to do with the traditional central bank response to inflation: raising interest rates, a step meant to slow down economic activity by making borrowing more expensive. An increase in interest rates has a side effect of reducing the resale value of existing bonds. That’s because when bonds with an interest rate of 3% start landing on the market, traders will pay less for bonds paying 2%. Prices can begin to fall even at the first hint that a central bank might be considering a hike.