So rose the chorus when news dropped last week of a surprise contraction in the Canadian economy and many economists concluded that the Bank of Canada’s job was done. With inflation moderating and the economy slowing, they reasoned, interest rates will go no higher and will, by next year, start coming back down.
After the advent of the neo-liberal regime and its ultratight monetary policies in the early 1980s, disinflation abounded. Both government deficits and inflation fell, making public debt an attractive and safe investment. Prices on Western government bonds rose with demand. Those bonds entered what would be a decades-long bull market.
Recently, though, all that’s gone into reverse. Inflation has risen in Western countries, and may well settle into athan in the past. This will very likely make the debt of those countries less attractive and safe – the reverse of the process that started in the 1980s. Add it all up and it’s looking increasingly likely that the decades-long bull market in Western government bonds has given way to what may be an equally long bear market. That will keep upward pressure on rates from here on in.