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The Bond Market Is Sending a Worrying Message About the Economy

Fixed-income investors don’t think the Fed can rein in inflation without stalling the recovery.

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Photo illustration: 731: Photo: Everett Collection

With precipitous drops in some leading technology stocks and wild swings in the S&P 500, equities have provided plenty of drama this year. But for clues to the direction of the U.S. economy, listen to the $23 trillion U.S. Treasury market. Right now, that market is saying inflation and the potential for a slowdown in growth are both threats.

People who buy Treasury securities don’t worry about getting their money back—the U.S. government always pays its bills. But they do worry about inflation, which erodes the value of future bond payments. They also worry about whether the U.S. Federal Reserve intends to raise the very short-term interest rates it controls. When investors expect higher inflation—and rate hikes from the Fed to fight it—they demand higher yields as compensation, so they’ll push bond prices down (yields rise when prices fall). And these days that’s just what they’re doing.