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Opinion
Kevin Muir

The Bond Market Refuses to Accept Economic Reality

Traders are working off an outdated playbook that assumes this recovery will resemble the sluggish one coming out of the financial crisis. 

When will bond traders accept that the cost of money is rising? 

When will bond traders accept that the cost of money is rising? 

Photographer: Paul Yeung/Bloomberg via Getty Images

Bonds have been as close to a sure thing as there is in financial markets over the past four decades. Since 1982, the Bloomberg U.S. Aggregate Bond Index has only had four down years, and never back-to-back. Yet, after falling 1.54% last year, the benchmark is already down 1.62% in just the first few days of 2022. Might this be the end of the winning streak?

To answer that question, we need to understand that bond investors continue to forecast a hot economy that is poised to buckle under the strain of even limited interest-rate increases. That can be seen in the difference between short- and long-term bond rates, known as the yield curve, which is flattening as investors price in more Federal Reserve rate hikes this year.