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Not Even Bond Traders Can Predict the Future

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Not Even Bond Traders Can Predict the Future

Bloomberg June 18, 2021
EconomicsMonetary PolicyFinance

Falling yields should be a source of concern, not a sign that inflation is being held at bay.

Consumer prices paid by city dwellers in the U.S. rose more than 7% last month and more than 9% in April on an annualized basis. If this keeps up the rest of the year, it will be the highest inflation rate the U.S. has experienced since the 1980s. But fear not, say some investors and the Federal Reserve, the bond market isn’t worried. Yields fell over the last week and remain low by historical levels, even after rising on the back of Jay Powell's speech Wednesday. And if markets aren’t worried, maybe we shouldn’t be either.

But there are reasons to worry about rising prices, and the bond market shouldn’t offer any comfort.

In theory, bonds are a barometer of future inflation. If inflation is high for the next 10 years, that would lower the return on a 10-year note. So investors want to be compensated for what they think inflation will be or for the risk involved when the outlook is uncertain. If either expectations or inflation risk increase, so should bond yields, but the opposite has happened in the last few weeks . That means one of two things:  Inflation will moderate, or bond prices aren’t accurately reflecting inflation risks.

Continue reading the entire piece here at Bloomberg

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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.

Photo by SUSAN WALSH/POOL/AFP via Getty Images

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