Thoughts on the State of the US Bond Market

Adel Abou Jaber is a student at University of Warwick. The views expressed in this note are his and do not necessarily reflect the views of Blominvest Bank.

The bond market’s massive repricing has meant the possibility of earning the highest real yields since 2011 with less risk relative to other investments. This paper aims to provide a summary of the current state of the US bond market. It highlights that tighter monetary policy, inflation uncertainty, and recessionary fears have pushed short-term yields above long-term yields, as shown by the recent inversion of the US Treasury yield curve. In turn, higher yields have fed through to the corporate bond market. Corporate bonds are starting to price in the risk of a recessionary environment through higher corporate credit spreads. Looking ahead, inflation and labor-market tightness are key macroeconomic factors that will influence the Federal Reserve’s future interest-rate decisions. In addition, higher liquidity risk in the bond market could affect future term premia. Finally, constraints to monetary and fiscal policy could imply more macroeconomic volatility in the future and increase bonds’ attractiveness due to their lower riskiness.

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Thoughts on the State of the US Bond Market

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