Headlines blame rising global bond yields on inflation fears, but the truth is more unsettling, said Desjardins.
The term premiums embedded in bond yields, which are the additional compensation investors demand to hold debt, have risen sharply, noted the bank. The last time the term premiums were this high, the sustainability of sovereign debt was in serious question.
Breakeven inflation rates suggest that market participants are confident central bankers will contain price pressures, stated Desjardins. However, with rate cuts no longer in the cards, war ongoing in the Middle East, and governments finding it difficult to rein in spending, investors appear more concerned about fiscal pressures.
In comparison to an oil-driven spike in inflation, that's a much more difficult problem for policymakers to solve, it pointed out.
Deficits are entrenched across developed economies. While Canada's relatively stronger fiscal position has shielded the Government of Canada (GoC) bonds from some of the worst of the turmoil, the domestic market is hardly immune to these pressures, added Desjardins. Yields further out the curve are highly sensitive to developments in other markets and much of what's happened there has been the result of global spillovers.
It's impossible to say whether this move has run its course. However, in the flurry of market activity, swap prices also now imply almost two full rate hikes in Canada over the remainder of this year.
Given the benign April inflation report released on Tuesday, the shorter end of the GoC yield curve seems like a good place to hide right now, according to the bank.