The Most Important Number of the Week Is 9.8%

In a week when the inflation rate jumped by the most since 2009 and retail sales posted one of their biggest monthly gains on record by surging 9.8% for March, the bond market predictably … posted on of its biggest rallies of the past year? Anyone with a passing knowledge of financial markets knows this isn’t supposed to happen. Bonds, specifically U.S. Treasuries, are what you sell when the economic outlook weakens. So with the economy booming by all measures, what gives? The answer may lie in the concept of perverse incentives.

The nature of markets is that it’s almost impossible to boil moves down to one explanation. The one that seemed to gain the most traction this week was that the rebound was simply a function of those who were bearish and called the big first-quarter selloff correctly deciding it was time to cash in their bets. This is the old “profit taking” explanation. But that’s not very satisfying. After all, why would an investor abandon a winning bet if all signs pointed to the wager continuing to work? Isn’t the consensus outlook for economic growth and inflation this year detrimental for safe, stodgy fixed-income assets?