The global bond market has finally found some breathing room.

After a punishing run that pushed average government-bond yields to the highest level in roughly 19 years, yields fell Thursday as investors digested the Federal Reserve's first interest-rate increase in three years and Federal Reserve Chair Kevin Warsh's renewed emphasis on controlling inflation.

The benchmark 10-year U.S. Treasury yield fell about three basis points to 4.99%, ending an eight-day streak of rising yields. Yields on 10-year government bonds in several other major markets also moved lower.

The retreat may look modest.

But after the bond market's recent surge, even a small decline is significant.

Investors had been dealing with a difficult combination of rising oil prices, persistent inflation, heavy government borrowing and uncertainty over the direction of monetary policy.

The latest Fed decision has not solved those problems.

But it has given bond investors something they have been missing: a clearer indication that the central bank is prepared to respond to inflation rather than allow higher prices to become entrenched.

On Wednesday, the Federal Reserve unanimously raised its benchmark policy rate by 25 basis points to 3.75%-4.00%.

It was the first rate hike in three years.

More importantly, the Fed's projections indicated that most policymakers still expect another increase this year.

Sixteen of 18 officials see at least one more quarter-point hike, while the median projected policy rate is in the 4.00%-4.25% range by year-end.

That is a hawkish message.

But it is also a form of clarity.

Bond markets had been experiencing an unusually sharp repricing partly because investors were uncertain about how aggressively the Fed would respond to rising inflation.

Now the central bank has provided a more explicit path.

The result was a modest recovery.

The recent bond selloff did not have a single cause.

Oil prices have surged above $100 a barrel following disruptions in the Middle East.

That raised concerns that inflation could remain elevated.

At the same time, U.S. government borrowing remains large, increasing the amount of Treasury debt that investors must absorb.

Technology companies are also borrowing heavily to finance AI infrastructure, adding to overall demand for capital.

Those forces helped push the 10-year Treasury yield above 5% earlier this week, its highest level since 2007.

The rise was global.

The average yield on government bonds worldwide reached its highest level in approximately 19 years, according to Bloomberg's market gauge cited by Yahoo Finance.

That makes Thursday's retreat more important than a normal one-day move.

It shows that investors are at least temporarily reassessing whether the worst of the bond selloff has passed.

The bond-market response was closely tied to Warsh's tone.

The Fed chair said inflation remains too high and argued that recent data did not show enough improvement in underlying price trends.

He described the rate increase as necessary to support a “timelier” return toward the central bank's 2% inflation goal.

That message may sound hawkish.

It is.

But it can also reassure bond investors.

Why?

Because bondholders worry about inflation eroding the real value of fixed-income payments.

A central bank that appears unwilling to tolerate persistent inflation can, in principle, provide greater confidence that long-term purchasing power will be protected.

That confidence can reduce the amount of inflation premium investors demand.

Thursday's decline in yields should not be mistaken for the end of the bond-market problem.

The 10-year yield remains around 5%.

That is dramatically higher than the levels investors became accustomed to during the post-financial-crisis era.

Moreover, the structural forces behind the recent selloff have not disappeared.

Government debt issuance remains high.

Oil prices remain elevated.

Inflation is still above target.

And the Federal Reserve is signaling that another hike may be necessary.

The bond market therefore has a new challenge.

The short end of the yield curve must price the possibility of additional Fed tightening.

The long end must simultaneously account for inflation, fiscal deficits, debt issuance and economic growth.

Those forces do not always move in the same direction.

The two-year Treasury yield is particularly sensitive to expectations for Fed policy.

It rose sharply after the Fed decision as traders adjusted to the possibility of another rate increase.

Longer-term Treasury yields behaved more calmly.

That produced a flatter yield curve.

The distinction is important because it suggests investors are increasingly separating two issues:

What will the Fed do with short-term rates?

And what will happen to inflation, government debt and economic growth over the next decade?

The Fed has considerable influence over the first.

The market determines the second.

The Fed's preferred inflation measure was running at 3.7% in July, substantially above the 2% target.

Warsh also said recent summer inflation readings had not convinced him that underlying trends were improving meaningfully.

That means policymakers are not yet comfortable declaring victory.

And that is precisely what Jamie Dimon emphasized after the decision.

The JPMorgan CEO said Wednesday that it was not clear to him that inflation had been defeated and warned businesses to prepare for continued interest-rate volatility.

The bond market appears to be listening.

The biggest near-term threat to the bond recovery may be energy.

Brent crude has surged above $100 amid severe Middle East disruptions.

If oil remains elevated, it could keep inflation higher for longer and force the Fed to tighten policy further.

That would likely put renewed pressure on short-term Treasury yields.

If oil prices retreat substantially, some of that inflation risk could fade.

That would give bond markets more room to recover.

This is why energy markets and Treasury markets are now tightly connected.

Even if oil prices normalize, another challenge remains: the supply of government debt.

The U.S. government is running large fiscal deficits and must issue substantial amounts of Treasury securities.

Other major governments are also borrowing heavily.

Investors therefore face a global market with an unusually large supply of bonds.

To attract enough buyers, issuers may have to offer higher yields.

That dynamic can keep long-term interest rates elevated even if inflation declines.

This is one reason Dimon's warning about global deficits is important.

The inflation story and the bond-supply story can reinforce one another.

There is another relatively new factor.

Artificial intelligence has created an enormous investment cycle.

Technology companies are spending heavily on data centers, chips, networking equipment, power infrastructure and related projects.

Those investments require financing.

Some companies are using cash.

Others are issuing debt.

As the AI buildout expands, demand for capital rises.

Dimon has argued that this enormous capital requirement can help keep rates elevated.

For bond investors, that means AI is no longer just a technology story.

It is also a macroeconomic story.

The United States is not the only major economy dealing with inflation and changing monetary policy.

The Bank of Japan is expected by markets to continue moving away from ultra-loose monetary policy.

European central banks are dealing with energy-related inflation risks.

The United Kingdom is seeing inflation pressures remain elevated.

In emerging markets, a stronger dollar and higher U.S. yields can create additional financial pressure.

That means global bond investors are having to evaluate several central banks simultaneously.

A shift in Japanese policy can affect global capital flows.

A change in European inflation can alter demand for government bonds.

A stronger U.S. dollar can tighten financial conditions worldwide.

The bond market is therefore becoming increasingly interconnected.

That distinction matters.

A three-basis-point decline in the 10-year yield after an eight-day rise is encouraging for bond investors.

But it is too early to conclude that the long-term trend has changed.

The market still needs evidence that inflation is declining.

It needs stability in oil prices.

It needs to see how much Treasury supply investors will absorb.

And it needs to understand whether the Fed follows through with another hike.

Until those questions are answered, bond volatility is likely to remain elevated.

That may be the most important takeaway.

Warsh's first major policy move was not the decision many political observers expected when he was selected to lead the Fed.

But the central bank acted unanimously and clearly stated that inflation remains too high.

The result appears to have reassured at least some bond investors that policymakers are prepared to confront the problem.

That does not mean markets expect rates to fall soon.

In fact, the projections point toward another increase.

But clarity can be valuable even when the news is restrictive.

For investors, the next important question is whether the 10-year Treasury can remain below 5%.

If it does, the recent bond selloff may prove to have reached a temporary peak.

If it moves decisively above 5% again, markets may interpret that as evidence that inflation and fiscal concerns remain too powerful for the Fed's policy response alone to stabilize long-term borrowing costs.

The difference will matter enormously.

Higher long-term yields affect mortgages, corporate bonds, municipal debt, stock valuations and government finances.

A sustained decline would relieve pressure throughout the financial system.

For now, global bonds have caught a brief break.

But the underlying debate has not disappeared.

Inflation remains elevated.

Oil remains volatile.

Government borrowing remains enormous.

AI investment continues demanding capital.

And the Federal Reserve has signaled that another rate increase may still be required.

The bond market has recovered some ground because investors heard a stronger commitment to fighting inflation.

Whether that recovery lasts will depend on something far harder to manufacture:

evidence that inflation is actually coming down.