Law of Unintended Consequences Caused the Great Bond Rout
Nobody could have predicted the Treasury market’s collapse of the last two years — apart from every critic of artificially low interest rates since John Locke.
Unintentional.
Photographer: Sarah Silbiger/Bloomberg
There is only one true law of history, and that is the law of unintended consequences. In the early 1920s, the University of Chicago economist Frank Knight famously drew a distinction between calculable risk and unknowable uncertainty. He overlooked a third domain: Unintendedness — where what happens is not what was supposed to happen. Those whose job it is to manage risk today tend to focus on the things to which probabilities can be attached and shrug their shoulders about everything else. They might do better if they simply assumed that most grand designs will go awry.
Take the sudden surge in nominal and real interest rates we are witnessing, which has seen the yield on a 10-year US Treasury rise from 0.66% in April 2020 to 4.88% this week. The last time the 10-year yield moved this much in the space of three years was 1979-82 — back when Fed Chairman Paul Volcker was slaying the 1970s inflation dragon — a period that saw not one but two recessions.