The relentless push higher in government bond yields may be starting to impact sentiment. Within the G3, 10Y Bund yields and 10Y JGB yields are breaking fresh cycle highs. 10Y US yields are lagging somewhat, but have nonetheless pushed into the 4.5-5.0% range (risks of overheating). Inflation has been top of mind since the US-Iran war started in late February. However, as the war drags (and energy prices stay supported) and the global economy (powered by the AI drive) stayed resilient, inflation looks to be a lot more persistent than market participants initially thought. 
While not directly comparable, investors are likely to take reference from the high inflation period in 2022 / 23 that was triggered by a combination of reopening pressures and an energy shock triggered by the Ukraine-Russia war. Firm economic momentum and complacency from the Fed led to a slow withdrawal of stimulus / slow initial phase of tightening that probably exacerbated the period of high inflation. Policymakers across the world are understandably wary of repeating the same mistake. The one key difference is that global interest rates are not floored at zero. Arguably, this means that the adjustments needed to bring policy settings back to restrictive territory need not be as aggressive as what was seen in the previous hike cycle. However, we would be somewhat cautious of risky assets, noting that stocks had a poor 2022 as implied real yields surged. Events could play out similarly, placing stresses on emerging markets as well.
Latest changes to our forecasts:
We expect the PBOC to stay on pause till end of 2027 instead of cutting 10bps in both years. Long-end CGB yields should find their footings amid firmer recovery momentum and improving trade relationship with the US. AI and related network development also requires increase in long-end bond issuance. 
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