Energy costs have dominated the pressures weighing on bond markets so far this year, but investors are now turning their attention to a potential new source of inflationary shock: food prices. Concerns are mounting that a combination of a severe El Niño event, tight fertilizer supplies, attacks on shipping routes, and Europe's record-breaking summer heat could drive up the cost of staple foods. Even with the Federal Reserve having raised interest rates and pledged to fight inflation, persistently rising food prices could introduce fresh challenges for bond portfolios.

Asset managers including Carmignac, Fidelity International, and Troy Asset Management are already positioning themselves, purchasing hedging instruments or reducing exposure to countries likely to be hit hardest by the impact. Marie-Anne Allier, who co-manages €7.6 billion in assets at Carmignac, stated, "I believe the next supply shock will emerge in the food sector. In my view, the market has yet to fully price in this risk, particularly as we expect the process to be gradual but persistent."

Soaring oil and natural gas prices this year, coupled with concerns over government debt levels in the US and Europe, have kept pressure on sovereign bonds, driving yields to their highest levels since before the global financial crisis. In contrast, food prices have been helping to temper inflation, thanks to bountiful harvests in 2025.

Economists at Barclays suggest this dynamic could shift as early as this autumn in Europe, with the potential for the trend to broaden next year if crop yields and exports continue to disappoint. The UN Food and Agriculture Organization's global food price index has already climbed to its highest point since late 2022. Meanwhile, economists at JPMorgan project that global food inflation could reach 5% by the first half of 2027, up from 2.8% in the same period this year.

Central banks are closely monitoring the situation, as food-related shocks have the capacity to lift household inflation expectations and ripple through the wider economy via increased wage demands. The Bank of England, which held its interest rate steady on Thursday, flagged "upside risks to food price inflation" looking into 2027.

Charlotte Yonge, who oversees more than £6 billion in assets at Troy Asset Management, also anticipates sustained food price inflation over the next six to twelve months. She believes that five-year inflation breakeven rates in both the UK and the US do not yet fully reflect this risk. To hedge against rising food costs and broader inflationary pressures, she is holding short-dated inflation-linked bonds in both countries.

Philip Fielding, a fixed income portfolio manager at Fidelity International, points out that Asia and Latin America are likely to bear the brunt of hotter, drier weather resulting from this year's El Niño phenomenon, putting agricultural output at risk in those regions. While the firm continues to see opportunities in emerging market returns, Fielding noted that they have trimmed their exposure to Latin American interest rates, reallocating towards countries less vulnerable to these climatic effects.