Borrowing costs in developing economies have increased the most since 2008, and issuers are responding by reducing or canceling bond sales. A sale of inflation-linked debt in South Korea raised less than 10% of target, while market volatility forced Romania to reject bids for a seven-year bond. In the four weeks that ended Wednesday, $6.9 billion was pulled out of developing-nation debt, according to data from EPFR Global.

The Treasury Borrowing Advisory Committee, which comprises officials from more than a dozen investment firms, advised U.S. Treasury Secretary Henry Paulson to eliminate the five-year Treasury Inflation-Protected Securities. The group said the bonds -- touted by former Treasury Secretary Robert Rubin as a way to reduce borrowing costs -- have cost taxpayers billions. Mihir Worah of Pacific Investment Management argued that such a move is shortsighted.

Although covered bonds make up a substantial asset class in Europe, there is no equivalent in the U.S. Treasury Secretary Henry Paulson is pushing for the market as an alternative funding source for domestic banks. Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays Capital, explains the opportunities and challenges that face a covered-bond market in the U.S.

Concerns about increasing prices fueled the rise of inflation-linked bonds in the U.K., while yields dropped as the gilts outperformed conventional paper. "Long-term inflation expectations have risen sharply in the past days and weeks, and you can see this in the inflation-linked gilt prices and yields," said Dominic White, a fund manager at Morley. "People are very nervous about inflation and that is something that must be a big worry for the Bank of England."

Inflation-protected U.S. government securities are unlikely to match last year's performance, analysts say. Treasury Inflation Protected Securities returned 11.6% last year, compared to 9.1% for all Treasuries. "I don't think there's any way they can produce anywhere as good returns in 2008," said James Evans, who manages inflation-linked bonds at Brown Brothers in New York.