A drop in energy prices would be temporary relief, but the bond selloff is not purely driven by the Iran war. The real drivers are the repricing of the neutral rate and term premium, not inflation expectations (which remain anchored). The DM bond selloff is structural and won't stop here.

The five-year, five-year inflation expectation anchor is well-anchored. The term premium and neutral rate repricing are the real drivers.

For the 10-year, 4.75% or even 5% could be the next step. For the 30-year, 5.5% to 6% is not too far off, based on structural forces: fiscal indiscipline, massive defense/AI infrastructure spending, aging demographics, and geopolitical turmoil.

These structural forces are causing inflation breakout risks in many countries.

The flattening is more about bond vigilantes warning central banks they are behind the curve, not about expectations of Warsh. The labor market is slightly improving (declining jobless claims, retiring baby boomers lowering participation, tight immigration policy). The Fed is unlikely to hike unless inflation expectations become unanchored, but also unlikely to cut easily. Best case: rates on hold.

The job market is not that loose and could tighten. There is no wage-price spiral. The Fed will watch how the Iran war pans out and whether the Strait of Hormuz reopens sustainably.

Both the Chinese yuan and bonds are serving as a true haven. The CNY has appreciated more than 3% against the USD year-to-date despite a widening rate differential. Chinese government bonds are the only major economy bond market that has been stable and performed well, driven by lack of domestic credit demand, weak growth, and massive liquidity.

The Sharpe ratio of CNY performance is very decent.

The global bond market is bifurcated: DM is selling off (led by UK, JGB, US), while EM is outperforming. The spread between EM and DM has narrowed from 300-400 bps to 100-150 bps, showing the real problem is in the DM world due to post-COVID fiscal indiscipline. She sees opportunities in Hungary and UK (where bad news is priced in), and likes Philippines for its steep curve, potential JPMorgan GBI index inclusion, and low foreign ownership (below 5%).

Central bank policies are bifurcating: BOJ slowly tightening, BOE on hold, ECB slightly tightening, Fed on hold. In EM, some central banks (Indonesia, Philippines) are hiking to stabilize currencies.