You may have heard news about turmoil in the bond market. There were even reports of “panic.” Yet the economy’s holding up. Nobody expects a recession any time soon. And the stock market remains close to all-time highs.
So what’s going on?
The global bond market encompasses $160 trillion in debt that investors trade every day. The bond market is a better indicator of economic trends than the stock market, which is subject to bubbles and abrupt selloffs. And the bond market is beginning to signal that governments and corporations are issuing too much debt, at a time when inflations risks are uncomfortably high.
A brief bit of history provides helpful context. The Federal Reserve intervened in bond markets during the Great Recession in 2008, buying several trillion dollars’ worth of bonds in order to force long-term interest rates down. It worked, and probably prevented a nasty recession from being worse. The Fed did something similar during the Covid pandemic in 2020. That drove rates on loans such as mortgages to all-time lows.