From the WSJ:
The jump in yields has been driven by strong economic growth and rising inflation outside the U.S., which has prompted central bankers in Europe, Japan and elsewhere to raise, or consider raising, rates. Last week, the European Central Bank increased its target interest rate to 4% from 3.75% and signaled that there are more rate increases to come. The Bank of England and the Bank of Canada are expected to raise rates next month, and the Bank of Japan looks poised to raise rates later this year.
That U.S. bond yields have jumped despite weak U.S. economic growth is further evidence of how interconnected the world's markets have become. Increasingly, the U.S. market is being influenced by global investors. That's in part because the U.S. imports far more than it exports to countries like China and makes up the difference by borrowing from foreigners, who have been flocking to U.S. bonds. To continue attracting those investors, U.S. bond yields need to compete with rising yields abroad.
And from Bloomberg:
European government bonds slid by the most in more than a year on concern quickening global expansion will prompt central banks to increase interest rates.
The slump sent 10-year bund yields to the highest since August 2002 as traders raised bets the European Central Bank will lift rates twice more in 2007 and as ECB official Erkki Liikanen said the outlook for growth in the region will stay positive. Bunds followed Treasuries lower after former Federal Reserve Chairman Alan Greenspan forecast rising yields and greater premiums on emerging-market debt.
``There's been a reassessment of global interest-rate expectations, which is hurting bonds,'' said Stuart Thomson, who manages 23 billion pounds ($45.5 billion) in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``The market is being driven down by a capitulation of long positions.'' A long position is a bet an asset price will rise.
The International Monetary Fund's World Economic Outlook highlighted the possibility of higher global growth outside of the US this year. This is where the rate pressure is coming from. Higher growth = higher demand = possible higher inflation.
