Energy inflation has yet to recede, and food inflation is about to "take over"! Global bonds may face a new round of shocks.

Title context: Energy inflation has yet to recede, and food inflation is about to "take over"! Global bonds may face a new round of shocks. Text: Since the start of the year, inflation concerns triggered by soaring energy prices, combined with market worries about the debt burdens of the US and Europe, have been the "root cause" weighing on the bond market, pushing bond yields to levels not seen since before the global financial crisis. Now, investors fear the next round of inflation acceleration may come from food. Inflation concerns drive global bond yields higher Thanks to a bumper harvest in 2025, food prices had been putting the brakes on inflation. But Barclays economists judge that this situation could change in Europe as early as this autumn; if crop yields and exports continue to be affected, the shift could spread to a broader range of regions next year. JPMorgan economists predict that global food inflation will jump to 5% in the first half of 2027, up from 2.8% in the same period this year. A super El Nio, tight fertilizer supplies, shipping disruptions, and the aftermath of Europe's record-hot summer will push up the cost of everyday food. A United Nations food commodity index has already risen to its highest level since the end of 2022. Even though the Federal Reserve has already raised rates and vowed to curb inflation, persistently rising food prices could still create new trouble for bond portfolios. Food commodity prices have risen sharply since June Asset managers including Carmignac, Fidelity International, and Troy Asset Management are buying protective assets or cutting exposure to countries that could be hit hardest. Among them, Carmignac investment manager Marie-Anne Allier said: "I think the next supply shock will be in food, and the market has not yet priced this in, especially given that we expect this process to be slow but persistent." To address this risk, Carmignac has been buying US and European inflation-linked government bonds. Marie-Anne Allier believes that every decline in the 5-year breakeven inflation ratean indicator that reflects the market's expectations for future price trendsis an opportunity to add to these positions. Central bank officials are closely watching the issue, because a food supply shock may have a greater impact on household inflation expectations than an energy shock, and could spill over into the broader economy by triggering demands for higher wages. Bank of England Governor Bailey said this month that inflation risks from food prices are "tilted to the upside." The Bank of England will share its latest views on prices further when it announces its rate decision later on Thursday. RBC BlueBay chief investment officer Mark Dowding said: "We think inflation in both the US and the UK is being underestimated by the market." Due to the deteriorating outlook for food and energy, the company closed a 12-month UK interest rate futures position last month. Macro strategist Skylar Montgomery Koning said: "Unlike energy, food has fewer second-round effects on production costs. Because demand for food is relatively inelastic, the inflationary impact of this shock is greater than the negative impact on economic growth. For government bonds that are already under pressure, this is an unsettling combination." Troy Asset Management investment manager Charlotte Yonge also expects food price inflation to gradually intensify over the next 6 to 12 months, and said that 5-year breakeven inflation rates in the UK and the US have not yet reflected this factor. Charlotte Yonge said she is hedging food price and broader inflation risks through short-dated inflation-linked bonds in the UK and the US. Laurence Mutkin, head of rates strategy for Europe, the Middle East and Africa at Canada's Bank of Montreal, said concerns about food price increases next year further reinforce his view to stay short 10-year UK gilts, with a target of yields rising to about 5.75%. Daniel Wood, fixed income portfolio manager at William Blair International, said bond yields in Eastern Europe have already risen more sharply to reflect the impact of the Russia-Ukraine conflict on the region's exports. He said that in Hungary, drought has pushed up imports, but a stronger local currency and weaker demand have helped contain the inflation impact. Daniel Wood said: "Countries that are highly dependent on imports, such as Egypt and Turkey, are also sensitive, especially when rising food prices are accompanied by a weakening local currency." "In Asia, countries such as India and the Philippines, where food accounts for a relatively high share of the consumer price index (CPI) basket, are also vulnerable to adverse weather patterns." Philip Fielding, fixed income portfolio manager at Fidelity International, said that because of this year's El Nio, Asia and Latin America may bear the brunt of hotter, drier weather, and agriculture is expected to be disrupted to some extent. He noted that the company still sees opportunities for good returns in emerging markets, but has "cut interest rate exposure in Latin America and shifted to countries that may be less affected." Others believe that the more prices rise for necessities such as food, the more economic growth will be suppressed, making it harder to justify rate hikes. Karen Ward, chief market strategist for Europe, the Middle East and Africa at JPMorgan Asset Management, said the labor markets in Europe and the US are not strong enough to support "sustained wage pass-through." However, given recent signs of resilience in economies facing global headwinds, many bond traders are unwilling to take that risk.