The market that just confiscated free lunch |
Markets seem to have this habit of teaching the same lesson until somebody finally understands it. Once again, the bond market is playing teacher and politicians are the slowest students in the room. Long-dated yields have quietly pushed back to levels last seen in 2009, just as central banks are still speaking the familiar language of “data dependence” and “careful calibration.” Perhaps the real story is now less about inflation prints and labour-market nuance and more about deficits, politics and war budgets turning up in the term premium.
Everyone talks about Powell and Lagarde; but isn’t the long end trading Donald Trump, Kevin Hassett, fiscal deficits and defence spending? Across the US, Europe, Japan and Australia, long-term government bond yields jolted higher even as the front-end drifted lower amid expectations of another Fed cut. Just when the Federal Reserve headed into its latest interest rate decision, 30-year US Treasury yields were back near multi-month highs, euro zone yields were pushing up, and markets were pricing virtually no further cuts from the European Central Bank, a policy hike in Japan and additional tightening in Australia. So, is it simply that the short end is still listening to central banks, but the long end is moving on?
The financial press is calling it a “disappointment trade” – investors realising that the rate-cutting cycle they had priced in was always going to be shorter and more constrained than the narrative suggested. The world almost convinced itself that the cuts of early 2025 restored something like pre-GFC (global financial crisis) normality. But the bond market seems to be saying, politely but firmly, that there is no going back.
The fiscal backdrop helps explain........