As bond selloff gets real, policymakers face fresh headache

As bond selloff gets real, policymakers face fresh headache

Thirty-year real U.S. Treasury yields rose above 0% on Friday for the first time since June and 10-year real yields rose 20 basis points (bps) last week.The selloff has even engulfed Europe, despite its lagging recovery and weak inflation, with Germany posting a 26 bps real 10-year yield increase last week -- the biggest in almost a year.Worse still, real yield rises are outpacing nominal yields in both Germany and the United States US10YT=RR . Essentially, market expectations of future inflation are falling at the same time that borrowing costs rise.The result is a tightening of financial conditions -- a negative for economic growth."If I were a policymaker I would be very concerned," said Charles Diebel, head of fixed income at Mediolanum International Funds."If real yields rise enough you suddenly have a pretty significant tightening in financial conditions and all the easing, monetary and fiscal, comes to naught."This may already be happening. A global financial conditions index compiled by Goldman Sachs has ticked to its highest in about a month.A liquidity index from CrossBorder Capital tends to fall 12 index points for every 100 bps rise in real yields, according to the consultancy's managing director Michael Howell.So this year's move