Bond markets wake up to inflation

Inflation concerns and central bank rhetoric have made their marks on government bonds. From Bloomberg:

The bear market for U.S. government bonds that began three months ago is just getting started.

For the longest period since 1980, U.S. inflation has been higher than what investors earn on 10-year notes, a sign that yields have further to rise. Treasuries paid 2.88 percentage points more than the consumer price index the past two decades, according to data compiled by Bloomberg. Investors who buy $10 million of the securities would lose $1.4 million over the next year if the relationship returns to normal...

The combination of rising commodity prices, Federal Reserve Chairman Ben S. Bernanke's renewed focus on inflation and his success in reviving capital markets after the collapse of subprime mortgages has turned Treasuries into a quagmire. Investors who bought notes due February 2018 on March 17, just after the Fed helped arrange the bailout of Bear Stearns Cos., have lost 6.2 percent, according to Bloomberg data.

The 10-year note, at 4.25 percent, yields no more than the inflation rate, leaving investors with real returns of zero. Consumer prices have exceeded 10-year yields by an average of 36 basis points since December, Bloomberg data show. In 1980, inflation reached a 33-year high of 14.8 percent and yields averaged 11.4 percent.

Consumer prices advanced 4.2 percent in May from a year earlier, the Labor Department said June 13...

Ten-year note yields rose 35 basis points last week, according to bond broker BGCantor Market Data. The increase was the biggest since July 2003, when they advanced 37 basis points...

Inflation concerns have become so pervasive that traders are pricing in Fed interest rate increases as soon as this month, according to fed fund futures...

Despite last Friday's decision by the BoJ to leave rates unchanged, Japanese government bonds have suffered a similar fate. From Bloomberg:

Japanese bonds completed a fifth weekly decline on concern quickening inflation will prompt the Bank of Japan to raise interest rates later this year.

Ten-year yields touched the highest since July as BOJ Governor Masaaki Shirakawa and his colleagues kept the overnight interest rate unchanged at 0.5 percent yesterday. Euroyen futures traders have added to bets that the central bank will boost rates. The BOJ said yesterday economic growth is slowing mainly because of rising prices, and Shirakawa said global inflation risks are escalating...

The yield on the 1.8 percent bond due June 2018 rose 4 basis points yesterday to 1.84 percent at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.338 to 99.662 yen. The yield gained 4.5 basis points this week.

It was the same story for Europe.

European 10-year government bonds declined for a fifth week on speculation the central bank will be forced to raise interest rates more than once this year to stem accelerating inflation.

The losses sent the yield on the German bund to an 11-month high as oil traded near $134 a barrel and policy makers warned about the risk of faster price growth. Inflation expectations as measured by French index-linked bonds soared this week to the highest level in at least 3 1/2 years...

The yield on the 10-year bund, Europe's benchmark government security, rose 21 basis points in the week to 4.63 percent in London. It climbed to 4.67 percent, the highest level since July 10. The price of the 4.25 percent bond due July 2018 fell 16.5, or 16.5 euros per 1,000-euro ($1,534) face amount, to 97.00.