Which is it: Faster growth or higher inflation?

That's the question people are asking as US Government Bonds Pay More Than Debt From Other Developed Nations.

Analysts said the rise in yields in part reflects optimism about the U.S. economy and expectations for a pickup in inflation, which threatens the value of government bonds by eroding the purchasing power of their fixed payments. A market-based measure of expectations for annual inflation over the next 10 years, known as the break-even rate, recently reached its highest levels since 2014.

“The U.S. has the highest rates of everyone in the G-10 and it looks like the rate differential will continue to widen,” said Chris Gaffney, president of EverBank World Markets. “The U.S. seems to be going it alone in this rising interest-rate path.”

At the same time, economic data throughout much of the world has failed to meet expectations, eroding support for bets that the euro, yen and other currencies would rise versus the dollar. While investors speculate about the Fed increasing its pace of monetary tightening, they have also reduced their expectations for tighter monetary policies in Australia, Canada, the U.K., Japan, the euro-zone and other economies.

Higher Treasury yields are pushing investors back to the dollar, after they crowded into bets that the euro would rise versus the U.S. currency. As economic data has weakened in Europe, pushing yields down even as monetary policy remains accommodative, signs of employment and inflation growth U.S. have persisted, lifting Treasury yields higher. That shift has squeezed some investors, leading many to exit the trade.

Investors say they are also looking at the yield differential because the gap has made it increasingly expensive for money managers in Europe and Asia to buy U.S. government and corporate bonds. Those investors are increasingly looking instead to buy debt in Europe, where hedging costs are not a problem. This dynamic could make borrowing more expensive for U.S. consumers and businesses, and act as a check on growth.

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