What is driving bond yields higher this year?

Recent rally in sovereign bond yield have spooked investors which is leading to massive sell offs in stock market around the world.

• German 10 year yield is trading close to 0.53% after trading as low as 0.05% on April 20th.

• UK 10 year traded above 2% after trading around 1.32% in February 26^th.

• US 10 year is trading at 2.2%, up from 1.87% on April 17^th.

What is behind this recent bond market rout?

We have been issuing warnings against market's lending to government at negative yields. At an extreme risk on environment it might make sense to pay premium to protect the capital, however current is not such.

• Investors are becoming increasingly convinced of return of global growth, in spite of risks associated with Greek exit from Euro zone or Middle East tensions or weaker growth prospect in China.
  
  
• Evidence now runs plenty from PMI data to unemployment that world is moving towards prosperity boom from 2008 recessionary bust.

In this scenario it hardly makes sense to lend at such rates.

• We have also been warning that Central Bankers' latest move of asset purchase could become over successful, driving inflation higher and turning the falling interest curve (that has been falling since late 70s).

With inflation rising rates would eventually move up. Investors might finally be taking note of it.

Why such an extended moves?

• Rise of yields have been remarkable in Euro zone with 10 year bund yield rising close to 50 basis points in just 12 trading days.

Such moves are not unusual given the crowded nature of the trade.

Inflation would not rise rapidly for now as with the interest rates, nevertheless investors should prepare for a reflationary environment with rising yields.