Inflation or recession? The tug of war in bond markets

The yield on ten-year American Treasury bonds is perhaps the world’s most important number, and for weeks it has been all over the place. Hundredths of a percentage point (basis points, in finance speak) matter in this market, because the Treasury’s borrowing costs underpin those for everything from mortgages to corporate bonds. It stood below 4% on February 27th, the eve of the American-Israeli war on Iran, jumped above 4.4% by March 27th and has since dropped back down. For many Americans, the difference between 4% and 4.4% is that between being able to afford a new house and not.

It is not just America: governments’ borrowing costs are in flux almost everywhere. At one point on March 23rd Britain’s ten-year yield topped 5.1%, its highest since 2008. Germany’s has hit 3.1%, higher than at any point since the euro zone’s sovereign-debt crisis. Japan’s has reached 2.4% for the first time since 1997. All saw bond yields soar in the wake of the Iran war, then fall back over the past few days (see chart 1).