The Mystifying Bond Market

The bonds have been defied by the Wall Street marketers. A declining trend is seen here.  This can be a sign of a weaker economy.

“It’s confounding,” said Michael Schumacher, director of rates strategy at Wells Fargo. “You’ve got some number of big players who for various reasons are pretty comfortable with the thought that economic growth is, I would not say weak, but not as spectacular as some people expected.”

The Mystifying Bond Market

The most closely watched U.S. interest rate metric — the 10-year Treasury note yield — again skidded below 1.3% Thursday level where it last traded in February, prior to last week. It was at 1.32% Friday. The surprise and swift decline is being blamed on a number of things, including short-covering, technicalities, peaking growth — and the Fed.

“What the market continues to hear is the Fed is getting cold feet on flexible average inflation targeting,” said Meghan Swiber, Bank of America U.S. rate strategist. “What the market is pricing is effective, if the Fed pre-empts a really full recovery in growth and inflation, that means they’re going to get a lower terminal rate.”

John Briggs, head of global strategy at NatWest Markets, said the growth scare and Fed tightening to stop inflation are two themes that could stay in the market for weeks. “It’s getting more attention because China’s [economic] numbers weren’t that good, and you’ve got the delta variant. The sustained nature of the move is what’s surprising. We’re back to 1.20s [10-year yield],” he said.

“There’s growth concerns. If the Fed tightens to cut off inflation, they’ll only be able to do it a few times. It’s not stagflation but whiffs of it. It’s all in the long end,” he said. The long end of the Treasury curve includes the 10-year, 20-year, and 30-year. The long bond or 30-year yield was at 1.95% Friday.

“I’m a guy who tends to be bond bullish, but if I look at inflation, let’s say it stabilized medium-term at 2.2% or 2.3%, how do you own a 2% long bond. You might as well go buy stocks. You’re getting negative real returns all along the Treasury spectrum,” he said.