In Bloomberg, Garfield Reynolds covers the weakness in bond markets following a flurry of better than expected economic news which is making clear that a recession is not imminent. Between March and June, bonds were in the midst of a spectacular rally due to inflation slowing, increasing signs that a recession was likely in the second-half of the year, and financial stress caused by the failure of regional banks.

Yet, these gains have been quickly wiped away in the past month amid strength in the labor market and consumption. Also, it’s now apparent that the Fed’s hiking cycle is not over. Consequently, a global index of government bond yields have hit their highest level since September 2008 which precipitated the Great Recession. Adding to bond woes is the consensus expectation that Treasury yields had peaked. 

It’s also impressive that despite weakness in regional banks, there has been no contagion effect in terms of tighter credit which could potentially add to recessionary impulses. However, some market participants are wary that further weakness in bonds could result in strains to the banking system and result in a ‘deposit flight’ to Treasuries. 

Finsum: Fixed income has been in a brutal bear market over the past month as the market’s consensus about a bond bull market, slowing economy, and the Fed being finished in terms of rate hikes have proven to be false.