"Unsettling Question": Where Would Rates Be If Markets Were Actually Worried About Inflation

Yesterday was a remarkable day in global bond markets. Ten-year US Treasuries experienced their worst session since Liberation Day in April last year, while 5-year Treasury yields rose above 5% for the first time since 2007 (and today isn't looking much better with 10Y yields blowing out another 8bps). Given that Brent is up around 73% so far in 2026, and US CPI has risen from 2.4% in January to an expected 3.60% in September, anyone outside bond markets could be forgiven for assuming the bond market is becoming increasingly concerned about inflation.

This couldn’t be further from the truth. While US 10-year nominal yields are up around 97bps so far this year, only around 10bps of that is due to higher breakevens. The remainder reflects significantly higher real yields, which are now at levels last seen in 2008.