The profound shifts behind the global bond market turmoil: deep economic structural changes and high inflation may become a recurring theme in the coming years.

This week, the global government bond market has faced a fierce sell-off, reflecting deep-seated anxiety among investors: macroeconomic factors are continually pushing inflation higher, while fiscal deficits and debt pressures in various countries show no signs of easing. The rise in yields is not solely due to increased government borrowing and rising energy prices. Investors are perceiving deeper structural changes: globalization is giving way to protectionism, and geopolitical conflicts are giving rise to tariff barriers, industry repatriation, and military spending expansions. These signals collectively point to a more fundamental economic restructuring, suggesting that inflationary pressures may remain elevated for a prolonged period. If this is indeed the case, it means that the relatively low and stable inflation environment since the global financial crisis has been disrupted, and the logic of investor portfolio allocation will be reshaped accordingly. Emma Moriarty, a portfolio manager at CG Asset Management, stated, The structural characteristics of the global economy have changed, and we are now experiencing inflationary rather than deflationary pressures. The tariffs, along with the outbreak of war in the Middle East, sharply reflect this shift in order. It would be a mistake to regard the energy shock as a temporary phenomenon, as the underlying structural changes triggering it may be quite durable. Yields Reach New Highs as the "Gray Rhino" of Public Debt Approaches This week, the yield on the U.S. 10-year Treasury note climbed to its highest level since November 2023; the yield on Japan's 10-year government bond hit 3%, the highest since 1996; the UK's 10-year government bond yield reached a post-2008 peak; and the yield on Germany's 10-year government bond, a benchmark for borrowing costs in the eurozone, also rose to its highest level since 2011. Long-term bond yields in these countries have reached levels not seen in years or even decades. Jon Cunliffe, head of investment at JM Finn, noted that while cyclical inflation pressures may continue to ease, investors should not expect inflation to return to the sustained low and stable state of 2010 to 2020. Cunliffe said, The key is whether artificial intelligence can exert a disinflationary effect by significantly improving productivitysomething that undoubtedly the new Chairman of the Federal Reserve, Mr. Waller, wants to see, as U.S. policymakers strive to address increasingly pressing fiscal issues. This weeks surge in yields, particularly the swift rise in long-end rates, highlights that investors are demanding a higher term premium amid increasing fiscal borrowing demands, ongoing inflation uncertainties, and a diminishing support for government bonds from the central banks of major economies. Haig Bathgate, CEO of Callanish Capital, stated on Wednesday that while this weeks sell-off reflects a degree of short-term volatility, persistent inflation throughout the yield curve will become a long-term feature of the market going forward. Regarding the "spiraling" public expenditure, Bathgate warned, One day, this will bear dire consequences. He added, Looking back at the history of the 1970s, once the Pandora's box of inflation is opened, it is hard to close it again. Its persistence exceeded everyones expectations. Inflation Difficult to Reduce, Growth Weakens; Central Bank Policy Paths in Dilemma In an environment where inflation remains sensitive to supply-side shocks and geopolitical disturbances, and economic growth is sluggish, major central banks face increasingly complex challenges in choosing their interest rate paths. Cunliffe noted, Against this backdrop, the Bank of England and the Federal Reserve may tolerate a temporary overshoot in inflation while closely monitoring for second-round wage and price effects. However, in other regions, the European Central Bank and the Bank of Japan are on a clearer tightening paththe former weighing inflation versus growth, while the latter proceeds to normalize monetary policy after inflation levels stabilize sustainably. After Federal Reserve Chair Wallers keynote speech on August 28 at Jackson Hole, Wyoming, market pricing for an interest rate hike at the Fed's upcoming meeting later this month increased from about 35% to over 66%. Padhraic Garvey, head of Americas regional research and global rates and debt strategy at ING, said on Thursday that the situation in Iran and high energy costs have added upward pressure on long-end yields, which is an urgent issue to be resolved for Europe, Asia, and beyond. International oil benchmark Brent crude rose more than 1% on Thursday to $96.64 per barrel, reaching a one-month high; U.S. WTI crude increased by 1.6% to $92.52 per barrel. Garvey further stated, If the situation were to stabilize, the current long-end yield levels for many issuers would still seem reasonable. The problem is that the situation is far from calmmultiple factors are intertwined, and most pressures still point towards a rise in long-end yields. The current situation is still within manageable limits, but if it worsens, it could turn catastrophic. Its hard to imagine that the upward pressure on long-end yields would simply dissipate. Garvey also indicated that market pricing for a 25 basis point rate hike at the September Fed meeting has shifted from roughly a 50-50 chance to about 75%. Bonds No Longer "Safe Havens"? Investors Reassess The surge in yields is also reshaping the logic of how investors allocate their portfolios. John Stopford, head of multi-asset income at Ninety One, stated, Increased volatility in inflation often raises the correlation between stocks and bonds, thereby diminishing the benefits of diversification from holding bonds in a balanced portfolio. However, rising real yields imply increased capital costs, which may enhance the relative attractiveness of bonds, especially since current stock valuations are at elevated levels. Brian Mangwiro, managing director of the global fixed income team at Barings, suggested that government bond funds should adopt defensive strategies and invest in shorter-duration securities. Multi-strategy fixed income funds can also aim for higher yields, but durations should still lean short. For the U.S., bond sell-offs and steepening yield curves often accompany a weakening dollar, which typically benefits emerging markets.