The sell-off in government bond yields has attracted a fair amount of excited commentary. The subtext is that something interesting is going to happen. From my perspective, the safe bet for (non-euro) developed government bond markets is for things to remain boring. Thus far, with the limited data that I have available, I do not see anything that is interesting from a systemic risk perspective.

I will start off with a disclaimer. Since I do not offer free investment forecasts, I certainly cannot say that I predicted this sell-off. Furthermore, there is no guarantee that this is the end of the process -- perhaps some corner of the markets will blow up in a more convincing fashion.

Finally, I have no idea how risk asset markets will react to higher bond yields. My view is that if the stock market cannot survive this level of bond yields, that represents a fundamental problem with equities.

The figure above shows the rise in the fitted 5-year Treasury yield from the Fed H.15 data, which ends Thursday. It is entirely likely that intraday pricing based on the 5-year benchmark might give rise to more volatility in the chart. 

Although some commentators have argued that this is the bond market defying the Fed's embrace of average inflation targeting, I am unconvinced. I think most estimates of the term premium are weak, and that the 5-year ought to have a steady positive term premium.

If we lop off a reasonable premium, current pricing is consistent with the Fed for a couple of years, followed by a rate hike campaign. Whether or not that timing is a mistake is unknown, but it is not more aggressive than the embarrassment that was rate hike pricing in 2010.

The pricing is consistent with a conventional view of how interest rates work. Even if the Fed deliberately lags the cycle, they will need to "catch up" to inflation thereafter. I am not a huge fan of that conventional story, but then again, I am not in charge of a large portfolio.