Since the end of March, global financial markets have been pulled in opposite directions. Government bond markets have experienced a slow-motion crash. On May 19, the yield on 30-year US bonds, which moves inversely to its price, rose to nearly 5.2 per cent, its highest level since June 2007. The average yield on 10-year sovereign bonds in the Group of 7 advanced economies has hit a 22-year high.

Global stock markets, on the other hand, have been on a tear. Since March 30, the MSCI World Index, a gauge of global equities in developed economies, has risen more than 13 per cent. The MSCI Emerging Markets Index, meanwhile, has gained 19 per cent.

A report from JPMorgan on May 19 noted that “equity and bond investors are not reading from the same script”. The findings of Bank of America’s latest global fund manager survey on May 19 revealed a record monthly jump in respondents’ allocation to equities. However, they also showed that a second wave of inflation was the biggest “tail risk”, underscoring the fears in bond markets.

The dramatic sell-off in government debt is hugely consequential. Higher yields send a signal that leading central banks will keep interest rates high or raise them further to bring inflation under control. A wide range of borrowers, from homebuyers to data centre developers, are likely to face higher costs.

The scale and breadth of the sell-off, as well as its multiple causes, attest to its global significance. The yield on Japanese 30-year debt crossed the 4 per cent mark last week for the first time since 1999. While 4 per cent might seem modest by Western standards, Japan’s 30-year yield was close to zero as recently as 2022. Its UK equivalent, meanwhile, reached 5.8 per cent, its highest level since 1998.

“When a single country’s bond market sells off, it is a local story. A fiscal or inflation surprise, a political shock, a central bank miscommunication. When four of them sell off all at once, it is a structural one,” Barclays said, also referencing a sell-off in France. The trigger for the surge in yields was the energy shock, which is entering a new and more dangerous phase as global oil inventories dwindle.