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Bond Market Is Unstable

Mar. 09, 2021 6:40 PM ET6 Comments
John M. Mason profile picture
John M. Mason


  • The $1.9 trillion fiscal stimulus bill that is being passed by the U.S. Congress will create a new economic environment, one that may cause changes in Federal Reserve policies.
  • Over the past decade and especially within the current disrupted environment, the Federal Reserve has been a constant support to the economy and to the stock market.
  • The current economic package could result in the Federal Reserve backing off from this support and this would result in investors having to completely change their expectations.
  • Just how will investors deal with a situation in which the Federal Reserve is not continually supporting a policy that has aimed to consistently err on the side of monetary ease?

It seems as if the signs are very clear. The passage in the U.S. Congress of the $1.9 trillion economic package of the Biden administration is seen as inflationary as far as the investment community is concerned.

I have been writing about this recently and current market responses, as the bill has gotten closer and closer to passage has just confirmed this viewpoint.

Yesterday, as the bill's passage became more certain, bond yields rose.

Briefly, the yield on the 10-year U.S. Treasury note hit 1.610 percent. This yield has not been this high since January 23, 2020, just before the Federal Reserve began to flood the market with liquidity so as to prevent any further financial market deterioration due to the recognition of the impact of the Covid-19 pandemic and the growing economic recession,

On Tuesday, March 9, however, the yield on this note dropped back to 1.54 percent in the early morning.

Investors are now seeing the highest level this has been in a very long time.

For one, investors seem to be seeing a rise in inflation and this observation is supported by the rise in the inflationary expectations built into the yield on the 10-year U.S. Treasury yield. As of Monday, inflationary expectations for the 10-year horizon now stand a 2.24 percent, consistent with the signals that Federal Reserve officials seem to be sending to the market.

But, investors also seem to be expecting a rise in economic activity due to the passage of the bill. Note that the yield on the 10-year Treasury Inflation Protected Securities (OTCPK:TIPS) also rose to a level it had not seen in quite a while. The yield on the 10-year TIPs rose to a negative 0.64 percent on Monday.

The yield on the TIPs, theoretically, is connected to investor’s expected real rate of

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (6)

well....at some point we will no more be able to predict what will happen.....just unstable future....in bond and stockmarket.....and maybe an high volatility....all bubbles will even more quickly bubbling....like a pot overcooking.
So to what will this lead?......all fiat papers will tanking....coz investors credit to them will be shaken. Endgame....
Actually I don't think it was a "very long time" since there were much higher rates, the last of my short term Treasury ladder matured in August 2020 and that was a 2 year at over 2.5%, I couldn't find records for my actual interest rate. So only about 2 years or so ago much higher rates.
The Federal Reserve is at the tipping point of of their two prong responsibility , low unemployment and stable prices. Fiscal action here to provide liquidity the inflation catalyst.

The Bond market will be smok`n
A lot of the recent market volatility (tech sell-off etc) was attributed to the rising bond yields, but, can sombody please explain, how can 1.54% rising to 1.610% explain such volatility? Those rates are minuscule at best to me.

What am I missing?
Jamjack profile picture
Nothing. Too low for too long. No real economic cycle of any conceqence at least since 08 - 09. The flush that refreshes. Any little up tick is viewed as terrible and painful. Also, debt is so large at the federal level any up tick sends more money to interest. The USA bond and money markets are really not in a good place.
@Jantzinvest A lot of the volatility has to do with algorithms and HFT's trading the S&P 500 and 10 year borrow crossover yield. This is a signal that equity investors are getting paid the same yield to take on substantially more risk, especially with valuations where they are. That is my theory. At 3% interest payments are double what they are now and the corporate debt market becomes tremendously shaky.
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