IF FIXED income investors have a mantra, it must be "high inflation bad, low inflation good". But the signs of slowing inflation are pretty universal at the same time as government bond markets suffered their worst monthly loss since 2004. Bank of America Merrill Lynch reckons global inflation has slowed to 2%, the lowest in four years, while its "trimmed mean" measure of inflation (eliminating the extreme numbers) slipped to 2.3%, and is falling everywhere bar South Africa and Israel.
So why the disconnect? Place your bets on which explanation seems most plausible.
1. Bond yields become artificially low earlier this year (one estimate was that 50% of the world's government bonds, by value, traded on a yield of less than 1%) are are now returning to more normal levels. Implications; move along, nothing to see here.
2. The rally in equities is indicating that markets/sentiment is at long last returning to normal after the crisis and bonds are losing their safe haven appeal. Implication; fill your boots with equities and sell your bonds as fast as possible as the trend will continue.
3. Hints from the Fed that it will taper QE later this year is causing investors to worry that bonds will lose their crucial support. Implication: mixed. It might mean the sell-off will continue or it might prove to be a self-limiting trend. the Fed may not stop QE if bond yields rise too fast. Economic data are not that great.
FWIW, your blogger is inclined to the first explanation (with a dash of the third thrown in) because of the inflation trend. To the extent that central banks can get out of QE (and I'm not certain they can) they will do it very, very slowly; history has two big examples of authorities ruining recoveries by withdrawing stimulus too soon (US 1937, Japan 1997) and the Fed knows this well.