What's Going On?

Geez, I leave the country and look what happens.  From the Financial Times:

The benign credit conditions that have helped fuel the global buyout boom came under threat on Thursday as the yield on 10-year US government bonds registered its biggest daily jump in years...

The yield on the 10-year US government note hit 5.14 per cent in New York trading, marking the biggest one-day advance in several years, before settling back to 5.10 per cent. That brought 10-year yields above those on shorter-term Treasuries, restoring a more normal – that is, “steeper” – yield curve.

If you were wondering why, the FT article provides some hints:

... yields on US, European and Japanese government bonds have been climbing for a month, fuelled by strong economic data and, in places, fear of inflation.

The inflation theme got some play this week in the Wall Street Journal (page A1 in the June 6 print edition):

For the past decade, low-priced labor from China, India and Eastern Europe has helped much of the world enjoy economic growth without the sting of inflation. Now that damper on prices is beginning to reverse -- and global inflation pressure is starting to build.

Hmm.  A few years back, the New York Fed's Jonathon McCarthy had a look at the impact of import prices on a country's inflation rate.  Here's what he found:

The response of consumer prices to an import price shock is also positive and usually statistically significant, although smaller than the PPI response (Figure 6). In absolute terms, the pass-through is largest in Sweden, quite large in the US, and small in Japan.

That sounds promising, but when Jonathon looked a little further he found this:

... despite the appreciation of the US dollar and the decline in import prices, these factors had little effect on the US disinflation once the oil price decline is taken into account.  Domestic price shocks also were a disinflationary factor in most of these countries...

Furthermore:

[we investigate] whether pass-through to domestic inflation may have changed. When discussing the influence of exchange rates and import prices on domestic inflation,some analysts point to greater global integration as a reason for a greater pass-through of these factors... They suggest that exchange rates and importprices have not assumed a bigger role in domestic consumer price inflation in recent years, and may even have had a smaller role. The conclusion that the pass-through is modest still appears to hold in this later period.

And though I only have the data through Wednesday, to my eyes the market for inflation-protected Treasury securities doesn't reveal much in the way of a jump in inflation expectations:

   

    

All this may help explain comments like this one, from the aforementioned Wall Street Journal article:

In remarks to a bankers conference in South Africa yesterday, U.S. Federal Reserve Chairman Ben Bernanke said rising Chinese domestic costs could eventually feed through to U.S. imports, but likely would only have "modest" effect.

To be sure...

Still, he reiterated that risks to moderating inflation "remain to the upside" in the U.S. because demand is high relative to capacity.

... but that is not a development that arose in the last several days.  So that leaves us to conclude that this week's run in bond yields are being "fuelled by strong economic data"?  Interesting question, but my flight back home beckons.  I'll ponder that one on my return.