Does the Bond Market Rule the Country?

by: Eddy Elfenbein

Eddy Elfenbein submits: I’m a fan of predictions markets, although I mostly think they’re just for fun. There is, however, some evidence that one of the best political markets is the bond market—specifically—short-term interest rates.

The direction of short-term interest rates has had a fairly good correlation with the political environment of the electorate. I should warn you by saying that this is a soft relationship, and not to read too much into it. But as short-term interest rates rise, the country generally turns to the right. Conversely, when rates fall, the country moves to the left.

It’s not that the Federal Reserve “pushes” the country, but it’s rather that the electorate is reacting to the same things causing the Fed to act. Few things make a country more conservative than a bout of inflation. The value of a country’s currency is one of those mystical bonds that connect a citizen to the state. When that gets ruptured, people don’t like it.

Here’s a chart showing the change of short-term interest during the last five GOP-heavy election cycles. The elections were 1966, 1978, 1980 (a particularly crazy time), 1984 and 1994. In each of these elections, voters had to face higher short-term rates. I’ve also include the current cycle.

Here’s the GOP gain in the house in each of those cycles:

1966 47
1978 15
1980 34
1984 16
1994 54

It’s almost as if the short-term debt market is a daily referendum on the running of the country. James Carville said that if he could be reincarnated, he’d want to come back as the bond market: “You can intimidate everybody.”

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