Bond Market Could Be Getting Ready for a Summer Rally

The sharp drop in Treasury yields in recent days has revived chatter that the worst for the bond market may be over. It’s still early to confidently forecast that scenario, but the odds for recovery are looking better these days after a two-year bear market for much of the asset class following the start of Federal Reserve rate hikes in early 2022.

A key factor driving yields lower is renewed concern that US economic activity is slowing, which has revived expectations that the Federal Reserve will soon cut interest rates. Bond prices move inversely to yields and so the prospect of policy easing has revived animal spirits in the bond market. The reasoning is that if economic activity is cooling, that will provide fresh support for stronger disinflation, which has stalled lately.

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