Bond markets are starting to do some of the lifting for central banks around the world by pushing up borrowing costs themselves, potentially reducing the number of benchmark interest-rate hikes needed to get inflation under control.

Yields have surged to multiyear highs after weeks of selling, tightening financial conditions even without further action from policymakers. Traders have responded by paring rate-hike expectations, with the amount priced into swaps across eight major economies falling by almost 200 basis points since mid-September, according to data compiled by Bloomberg.

There are few signs the bond selloff is abating as concerns over fiscal spending from the US to Japan and France push investors to demand more compensation, while a slew of AI-related debt issuance soaks up capital.

The higher borrowing costs are spilling into mortgages and junk credit, delivering some of the economic restraint central banks would otherwise seek through higher policy rates.

“The more tightening markets price, the tighter financial conditions become,” said Ken Orchard, head of international fixed income at T. Rowe Price, which oversees $1.9 trillion. “And the tighter financial conditions become, the less tightening central banks may ultimately need — or be able — to deliver.”Traders are now pricing in a combined 539 basis points of rate hikes across the eight economies, down from 717 basis points in September, when expectations were the highest since 2022, data compiled by Bloomberg show. The biggest pullback has been in Australia, followed by the euro area amid concerns over France’s fiscal outlook, then South Korea and Canada.

Red more: Europe’s Indebted Nations Are Starting to Blink at Market Wrath The average yield on global government bonds has climbed above 4% to the highest since 2000, raising the question of where the tipping point lies. Higher yields may do some of central banks’ work for them, but if they appear too focused on bolstering growth, investors may doubt their commitment to fighting inflation and demand an even bigger premium to hold longer-dated debt.

“Central banks would ultimately have to balance the growth mandate with near-term inflation risk,” said Yuxuan Tang, Asia head of rates and foreign-exchange strategy at JPMorgan Private Bank. “We think most rates markets are now overpricing the risk of further hikes, given the increasing downside risks to growth from the war’s repercussions.”For investors, that may make bonds look attractive again. High-quality fixed income is a buy because they remain one of the best hedges against inflation and a slowdown in growth, Tang said, adding that the sharp rise in yields over the past month has materially improved the risk-reward trade-off.

Deutsche Bank AG is now seeing opportunities in US Treasuries. “Our view is that at least from an energy perspective, this situation won’t stay forever,” said Christian Nolting, its global chief investment officer for private banking based in Frankfurt. “The energy situation will get better and inflation is coming down. And from that perspective, I don’t think we are in a full hiking cycle.”

Barclays Plc strategists say markets have already taken some of the pressure off the Federal Reserve. “Some of the tightening has occurred independently of expectations for additional Fed hikes,” they wrote. “All else equal, that should reduce the urgency for the Fed to raise rates, even if the risk-management framework leaves the bias toward further tightening intact.”Not everyone is convinced. Some say markets are still underpricing the risk of hikes, with the war prolonging inflation pressure through elevated oil prices.

Oil remains above $100 a barrel as traders weigh Iran’s escalating attacks on tankers in the Strait of Hormuz against President Donald Trump’s comments that the US would “not be attacking” Tehran before November’s midterm elections.

What Bloomberg’s Strategists Say...“Real activity has absorbed repeated bouts of uncertainty and tighter financial conditions better than expected, reinforcing expectations that the equilibrium policy rate is higher than previously thought.”— Michael Ball, Macro Strategist. Click here for more.

Even if damage to growth becomes harder to ignore and central banks pause, fiscal concerns may limit the drop in longer-dated yields, according to Kenneth Goh, director of private wealth management at UOB Kay Hian in Singapore.

Treasury Secretary Scott Bessent has sought to reassure skeptical investors, saying stronger growth and spending restraint will “very quickly” improve the trajectory of US borrowing. In Japan, Prime Minister Sanae Takaichi said her administration is prepared to review spending and revenue plans if bond yields move unexpectedly.

Yields on US 10-year Treasuries have jumped more than 70 basis points since the start of the second half, while equivalent yields in Japan have risen 31 basis points and those in Germany and France have climbed 61 and 121 basis points, respectively.

For now, policymakers are signaling they’re prepared to act. Fed officials voted unanimously last month to raise their benchmark rate for the first time since July 2023, although some have advocated flexibility in a sign they may not act again this month. India has turned more hawkish, with the Reserve Bank raising rates for the first time in nearly four years and signaling further tightening ahead.

That backdrop will loom over the International Monetary Fund’s annual meetings in Bangkok starting Monday, where global policymakers will focus on growth, inflation, rates and government debt. Wednesday’s release of the US’s consumer price index for September will also be closely watched for clues on the Fed’s rate path.