Dissecting the Bond Market

The focus of this piece is on the bond market since I’m getting more questions about that than anything else these days. So, let’s unpack what has been going on in this maligned segment of the financial space and where I think we are going from here because, quite frankly, I like where Treasury yields currently sit… as in, I like them a lot.

When we isolate what is happening in the Treasury market yield “meltup” from the nearby lows, we can see that both real interest rates (growth induced) and TIPS breakeven levels (inflation expectations proxy) remain rangebound. That is not the story. The story is in the term premium, which reflects the inherent policy risks and uncertainty embedded in nominal bond yields. The market interest rate that is not explained by the economy, inflation, or the Fed — the sort of things that are only explained by other factors. At first, the surge in yields reflected all the uncertainty surrounding trade and tariff policy, but that took a bit of a respite in mid-to-late April when the President offered olive branches with respect to the reprieves on the reciprocal tariff file. What then replaced that uncertainty was the fiscal risk premium embedded in the Treasury market as investors sense that the White House and Congress are bent on taking what already was an unsustainable budget path into a completely different orbit. A worry that, in my opinion, is way overblown.