Forecasts that rates will rise faster and further than expected sent bonds sharply lower last week and yields surging. The 10-year US Treasury saw the worst weekly loss in five months and is now yielding 4.853 per cent, the highest level since the Federal Reserve started raising rates in June 2004.

The yield on the 10-year German Bund is near 15-month peaks at 3.774 per cent, the UK-gilt is yielding 4.383 per cent, the highest since last November, and 10-year Japanese government bonds are yielding 1.765 per cent, the highest in 19 months.

Some observers think yields will rise as central banks continue to tighten. It is the first time since the 1980s that central banks in the “G3” – the US, the eurozone, or its previous equivalent, and Japan – are all draining excess liquidity from the global financial system.

It is possible that we could see 10-year US Treasury yields going over 5 per cent and Bunds over 4 per cent in the next few months as long as we have the monetary tightening bias going on. The bearish trend is pretty strongly established.

There has been a dramatic shift in interest rate expectations since the beginning of the year. In January, the market had priced in a year-end Fed Funds rate of 4.75 per cent with a 50 per cent chance of it being lower.

Now 5 per cent is fully priced in along with almost a 50 per cent chance of 5.25 per cent. The Fed raised rates by another quarter point to 4.75 per cent last week but signalled more to come.

Neither the European Central Bank nor the Bank of England are expected to make changes when they make their rate decisions this week. But the market is pricing in more aggressive moves in the eurozone, with the next rise coming as early as May, and rates rising to as much as 3.5 per cent by the year-end from the current 2.5 per cent.