In the Market: US bond market signals the end of an era

Church Brewing: where the customers are the congregation and the choir | SaltWire - The U.S. bond market is calling a moment: the age of low interest rates and inflation that began with the 2008 financial crisis has ended. What follows is unclear.

Instead, it shows investors have come to believe that the U.S. economy is probably now in what a regional Fed president said may be a"high-pressure equilibrium," characterized by inflation running higher than the Fed's 2% target, low unemployment rates and positive growth. It could also force the Fed to keep raising rates to the point something breaks again, like three U.S. regional banks did in March. Minneapolis Fed President Neel Kashkari wrote last week that if the economy was in a high-pressure equilibrium, the Fed would"have to raise rates further, potentially going significantly higher to push inflation back down to our target."Kashkari did not respond to a request for comment.

At the same time, the second component of yields in the model -- what the market pricing implies short-term interest rates will be in 10 years -- has also risen rapidly in recent months, reaching around 4.5%. That shows investors believe the Fed funds rate, which is currently in the 5.25%-5.50% range, will not come down much in the coming years.

"A very deep pocketed Treasury investor is leaving the market little by little," said Emanuel Moench, one of the authors of the Fed model who is now a professor at the Frankfurt School of Finance and Management."That should add to some uncertainty around the likely path of Treasuries.

The neutral rate, for example, determines whether the Fed's policy rate will slow down or stimulate the economy, but no one really knows what it is until something breaks. Estimates vary widely.

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In the Market: US bond market signals the end of an eraThe U.S. bond market is calling a moment: the age of low interest rates and inflation that began with the 2008 financial crisis has ended. The market's view has come into sharp focus in recent days amid a dramatic run-up in 10-year Treasury yields that hit 16-year highs. Behind that move is a bet that the disinflationary forces the Federal Reserve fought with its easy money policies in the aftermath of the financial crisis have abated, according to investors and a regularly updated New York Fed model based on yields.
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