The Bond Market Is Telling Us to Fear About Development, Not Inflation

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“The predominant concern, reflected in the bond market, is that peak growth has been reached and the benefits of fiscal policies are starting to wear off,” said Sophie Griffiths, a market analyst at forex broker Oanda, in a research note.

For example, evidence of a more measured growth path emerged this week in a report from the Institute for Supply Management. It was found that the service sector continued to expand rapidly in June, but much less rapidly than in May. Anecdotes contained in the report supported the notion that delivery problems were slowing the pace of expansion.

“Business conditions continue to recover; However, the challenges in the supply chain are numerous, as everywhere, ”reports an anonymous trader who took part in the ISM survey. “We continue to see cost increases, delayed deliveries, postponed lead times and no clarity as to when the forecast balance will return to this market.”

The shifts in the bond market could put the Federal Reserve on the wrong side of plans to reverse its economic support efforts. At a monetary policy meeting three weeks ago, some Fed officials were ready to cut bond purchases in the near future, and some expected to hike rates over the next year, contrary to a more patient approach that Fed Chairman Jerome Powell has advocated.

In one of the stranger paradoxes of monetary policy, the tendency that markets perceive as the Fed’s greater openness to rate hikes has contributed to the decline in long-term interest rates. Global investors are betting that any potential preemptive monetary tightening will result in a stronger dollar, slower growth, and fewer opportunities for the Fed to hike rates in the future without slowing the economy.

“The market read the minority views within the Fed on the rate cut and rise as a signal that the Fed was blinking in its decision to overheat the economy,” said Steven Ricchiuto, chief US economist at Mizuho Securities . “A weaker global economy and a stronger US dollar mean that we have greater potential to import global deflation.”

There are silver linings to the revaluation that is taking place in the markets. Lower long-term interest rates make borrowing cheaper for Americans – be it Congress and the Biden government considering how to pay for infrastructure plans, or home buyers trying to buy a home.