Bond Market Disarray

Lower in yields in 10- and 30-year bonds have been deeper and longer than anticipated. Growth in Q2 was expected to be a median 9%, according to economists. But inflation and economic concerns have been spurred somewhat by the Covid-19 Delta Variant and the possible slowing of a recovery. Many sectors, chips for electronics and cars as an example, are still lagging.

A new round of slowdowns could deepen the severity of the shortages we are still seeing in many areas. Therefore, concerns about the economy are clearly in focus. The Fed is buying $120 billion in Treasury and mortgage securities each month. The Fed has stated that before raising rates we will first see a reduction in bond buying. “What the market continues to hear is the Fed is getting cold feet on flexible average inflation targeting,” Meghan Swiber of Bank of America commented.

Historic economic models of lower rates leading to higher inflation may now be defunct. This assessment, old model, hasn’t really worked and has been significantly skewed by globalization, online competition and weak worker power have ensured prices stay under control.