Reading dude's book now and I'm having a pretty good time with it, so let's see what he makes of the bond market meltdown:
The bond market is a fascinating place. Unlike the stock market, it can move up and down for both “good” and “bad” reasons, and those reasons can be highly subjective. That makes fixed income a wonderful financial Rorschach test.
Specific factors:
- Trump statements (tariffs or undermining America's monetary privilege)
- France burning
- AI bond splurge/crowding out
- "mortgage convexity hedging" whatever the fuck that is.
- more backround ones: gov fiscal madness and global savings drying up.
2 Major Bond Market stories:
- INFLATION and INFLATION EXPECTATIONS
Inflation was already uncomfortably high in many countries, and the energy disruptions from the war on Iran have worsened the problem. Inflation is the nemesis of fixed income, so it is natural that investors will demand greater yields to hold them.
- GLOBAL GROWTH is crazy good
The global economy has proven remarkably resilient this year, and that has forced interest rate expectations higher as well. Alphaville actually has some sympathy with the global growth argument,
uh-hu... break-even rates are more or less flat, meaning it cannot be a generalized debasement trade/everyone rushing out of bonds for fear of inflation
...aaaand
the real explanation for the paradox of an inflation shock not hitting breakeven rates: a newly hawkish Federal Reserve:
- Hawkish Fed => real yields up, breakevens down
- higher energy prices = breakevens up
plus, basically no shift either to long-run (real) yields and GDP growth.
It's an inflation (well, "inflation") and Fed story (#1, above)
"To put it a bit more simply, the Federal Reserve signalling that it won’t shy away from raising interest rates — as some investors have feared it might under new Trump-installed management — has helped keep inflation break-evens subdued, even as higher rate expectations have lifted bond yields."
the core reason why bond yields are higher is still inflation stemming from the Iran war-triggered energy shock, despite break-even rates staying quiescent. It’s just manifesting itself as a real yield shock, because of the Fed.
Doesn't that mean, the Fed did it? Because in the absence of an oil price jump, breakevens would have fallen too and your divergent metric would suck...? I dunno, I'm not a Fedwatcher
The 2 stories part is key. Inflation from Iran war energy shock makes sense, but the global growth resilience is the real plot twist - good economy = higher for longer rates, bad for bonds. If break-evens are flat at ∼2.4%, then it's not debasement fear, it's just real rates rising. Which ties back to France burning + US fiscal madness - supply of bonds up while growth up. Perfect storm. FT Alphaville piece always frames fixed income as Rorschach test, this fits.