Spike in nominal yields hit longer-dated inflation-linked bonds YTD

As economies recovered from the Covid-19 pandemic, investors have rotated away from conventional government bonds and sought inflation protection in the reflation trade by switching into inflation-linked bonds. As a result, yields on inflation-linked bonds (IL) fell sharply. 

Unlike real yields, nominal yields have risen sharply during the same period, pushing breakeven inflation to multi-year highs. Central banks had been more accepting of inflation running above-target levels during the pandemic, and there were fears this accommodative stance would extend during the war in Europe. Even so, the increase in value of IL bonds and the decoupling of nominal and real yields were unusual.

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