Michael Mackenzie says in the FT that the reason that bond yields rose last week is that investors have been scared by the Fed’s apparent desire for higher inflation. I think this is not a good explanation, for the following reasons.

  1. 10-year Treasury yields have jumped about 40bps, but the 10-year TIPS breakeven (a market measure of inflation expectations) did not jump nearly so much.
  2. German bund yields also rose last week, even though the ECB is hawkish on inflation.
  3. Last week’s scare was deflationary — it was all about Chinese tightening and a slow-motion run on the Irish banking system.
As I said last week, I think the moves were all about China. Treasuries fell for a technical reason: if the Chinese buy fewer Treasuries, there is less demand and the price should fall. Bund yields rose because Bunds and Treasuries are to some extent substitutes. If it had been all about inflation in the US, you would expect Bunds and Treasuries to have diverged as the degree of substitutability changed.