Bonds Are Predicting Another Hawkish Fed Mistake
The conundrum of falling longer-term yields implies traders think policy makers will tighten too early, whatever Jerome Powell says.
To a surgeon with a scalpel, the need for an operation is obvious.
Photographer: Ulrich Baumgarten/Getty Images
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The bond market has another conundrum. Almost 20 years ago, Alan Greenspan admitted that it was a “conundrum” that longer bond yields barely rose as he steadily raised short-term rates in his latter years at the Federal Reserve. Now, inflation may or may not prove to be transitory, but it is the highest in decades. Month after month, the official numbers have turned out higher than expected. With higher inflation, investors should in theory demand a higher yield from bonds to compensate for the erosion of buying power. And any suggestion that interest rates are going to go up should, as Greenspan implied, lead to higher long-term yields. Yet they are falling.