① Since the beginning of this year, sharp increases in energy prices have been a persistent nightmare for global bond markets. Now, investors are worried that the next surge in inflation will come from food; ② They believe that the impact of a "super" El Niño event, tight fertilizer supplies, shipping disruptions, and Europe's record-breaking heatwave could drive up food costs and pose new challenges for bond portfolios.
Since the beginning of this year, sharp increases in energy prices have been a major headache for global bond markets. Now, investors are worried that the next surge in inflation will come from food.
As the conflict in Iran drags on, compounded by the onset of an exceptionally strong El Niño, global food security risks are mounting. Market attention is shifting from "energy price shocks" to "food price shocks." Investors are growing increasingly concerned that food inflation will be the next major driver of rising prices, threatening the global bond market.
They believe that the impacts of a "super" El Niño event, tight fertilizer supplies, shipping attacks, and Europe's record-breaking heatwave could drive up food prices. Even with the Federal Reserve having raised interest rates and pledging to curb inflation, persistently rising prices could still pose new challenges for bond portfolios.
Warnings of food inflation keep mounting.
Since the beginning of this year, surging oil and natural gas prices, coupled with market concerns over the debt burdens of Europe and the United States, have kept government bond yields under pressure, pushing them to near two-decade highs. Meanwhile, thanks to a bumper harvest in 2025, food prices have continued to help contain inflation.
However, Barclays economists believe this situation could begin to shift in Europe as early as this autumn. If U.S. corn production declines due to extreme heat and the Russia-Ukraine conflict continues to drive up wheat prices, global food inflation is likely to spread further next year.
The United Nations Food and Agriculture Organization's Global Food Price Index has risen to its highest level since the end of 2022, while JPMorgan economists forecast that global food inflation will climb to 5% in the first half of 2027, up from 2.8% during the same period this year.
Philip Fielding, a fixed-income portfolio manager at Fidelity International, said that, driven by this year's El Niño phenomenon, Asia and Latin America are likely to bear the brunt of hotter, drier weather, putting agricultural production at risk of reduced yields. He added that while the firm remains optimistic about return opportunities in emerging markets, it has scaled back its exposure to Latin American interest rates and shifted allocations to countries less affected.
HSBC analysts recently sounded the alarm in a report, noting that tightening grain supplies, the El Niño phenomenon, disruptions to key maritime shipping routes, and the resulting supply squeezes are driving up grain prices.
The bond market faces new risks.
Bloomberg macro strategist Skylar Montgomery Koning notes that, unlike energy, food has a relatively muted second-round impact on production costs. However, since food demand is relatively inelastic, such shocks tend to be more inflationary—raising concerns for government bonds already under strain.
Laurence Mutkin, head of European, Middle Eastern and African rates strategy at the Bank of Montreal, said that concerns about next year's food price increases have reinforced his view of maintaining a short position in 10-year UK government bonds, with yields potentially rising to around 5.75%.
Franklin Templeton recently stated that food inflation could push overall inflation up by roughly one percentage point next year, prolonging price pressures and thereby weighing on government bond performance.
Meanwhile, central banks around the world are closely monitoring food prices, as food shocks could push up households' inflation expectations and, by triggering wage‑increase demands, transmit to the broader economy. On Thursday, the Bank of England held interest rates steady while noting that, beyond 2027, "food inflation faces upside risks."
"We believe that inflation in both the United States and the United Kingdom has been underestimated," said Mark Dowding, Chief Investment Officer at RBC Bluebay.
Investors are positioning themselves in advance.
Asset management firms such as Carmignac, Fidelity International, and Troy Asset Management are purchasing hedging instruments or reducing their investment exposure to countries that could be hit hardest.
"I believe the next round of supply shocks will emerge in the food sector," said Marie-Anne Allier, who co-manages €7.6 billion in assets at Carmignac. "I think the market has yet to fully price in this risk, especially since we expect the adjustment to be slow and prolonged."
To manage risk, Carmignac has been purchasing U.S. and European inflation‑linked bonds. Allier views every decline in the five-year breakeven inflation rate as an opportunity to increase these positions.
Charlotte Yonge of Troy Asset Management, which oversees more than £6 billion in assets, also expects food-price inflation to remain elevated over the next six to twelve months and believes that the five-year breakeven inflation rates in the UK and the US have yet to fully price in this risk.
She stated that she is hedging against rising food prices and broader inflation risks by holding short-term UK and US inflation-linked bonds.