From the depths of pessimism two months ago, dramatic rises in government yields have been seen in most big economies. At two-year maturities the shift has been close to a percentage point in the US, eurozone and UK. Even Japan has seen a clear upward move.
About half of the US rise can be explained by a shift in real interest rates (that is, excluding inflation). The extraordinary flight to safety which pushed real yields well below zero is unwinding. With central banks lending freely in the money markets, fear of bank failures has receded. Confidence is growing that monetary policy will not be subordinated to ensure the survival of banks.
Assuming all of this is correct, that suggests base rates will again be set with inflation primarily in mind. While the financial world has focused with appalled fascination on the banking sector, price rises have picked up. In both the eurozone and UK, that means a flurry of rate cuts is no longer expected, while in the US a one-fifth chance of a rate rise by September is being priced in.
Is it remotely sensible that markets have moved so quickly from worrying about a depression to worrying about inflation? Soaring food and oil prices are clearly an immediate problem. Yet even ignoring commodities, if global growth is respectable then inflation will be a problem. After all, before the credit crisis rudely interrupted, the world economy was operating at full capacity, using International Monetary Fund estimates.
The shift in the yield curve might be a self-correcting mechanism: higher long-term yields could act as a brake on growth, for example by making mortgages more expensive. But there is also a clear threat public inflation expectations could spiral further upwards, possibly feeding into wages. The yield curve tells the story of a global economy with bipolar disorder: when it is not collapsing, it risks overheating. Goldilocks is not coming back.
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