Rising inflation can lower the real yield on a bond as the currency that the bond is issued in depreciates over time. Bond yields have been falling since last week after major central banks pushed back against calls to raise interest rates. In the past few weeks many central banks, including the Bank of England, decided to postpone a rise in interest rates to tackle rising inflation.
The Bank of England was expected to increase its official bank rate on November 4.
However, the BoE decided to stick to the all-time low of 0.1 percent for a longer period.
Inflation in the UK has been rising for the past year and is currently 3.1 percent.
Following a similar pattern as the Bank of England, central banks across the eurozone have delayed a rise in interest rates.
In other European nations, the effect was similar.
Italy’s 10-year bond yield hit a 26-day low of 0.847 percent.
The Italian 30-year yield hit its lowest since September 23 at 1.683 percent.
In Germany, the nation’s 10-year inflation-linked bond, which factors in real-time inflation, fell to a record low of 2.09 percent.
Speaking to Reuters, senior rates strategist at ING Antoine Bouvet said the pushback by central banks against the implementation of interest rate increases helped explain the move to lower real bond yields.
He said: “Developed market central banks threw away an opportunity to prove they’re not behind the curve, so demand for inflation hedges rises as a result.
“Whether inflation fears will prove justified or not is besides the point.
“In the near term, investors have no reason to doubt inflation risk is rising.”
However, on Monday European Central Bank chief (ECB) economist Philip Lane said that increasing interest rates to cool rising inflation in the Eurozone would be counterproductive.
Although ECB supervisor Andrea Enria said on Tuesday that low ECB interest rates were now hurting bank margins.
Producer inflation data in the US has caused a drop in the yield on the benchmark 10-year US Treasury note.
Wholesale prices for products in the US have risen by 8.6% from a year ago in October.
This is the highest annual increase in producer price index records in the US in the last 10 years.
US Federal Reserve vice-chairman Richard Clarida said: “If the outlooks for inflation and unemployment turn out to be the actual outcomes, then I do believe that these three conditions for raising the target range of the funds rate will have been met by year-end 2022.”