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Bond Market Narrative Fails

The irritating thing about the failure of the “bond bubble” calls in recent years has little to do with bad market predictions.  Anyone who’s been in the markets for more than a few years knows that bad predictions happen.  But what’s really frustrating about the failure of the “bond bubble” calls is that many of these calls were based on failed narratives.

Over the last 5 years we’ve repeatedly heard some version of one of the following:

  • Interest rates will rise because the US government is bankrupt!
  • Interest rates will rise because the bond vigilantes are coming!
  • High inflation is coming to ruin all of our lives!
  • The USA is just like Greece!
  • The US government has printed so much money that high inflation must eventually come!

These were all scary narratives that were repeated time and time again by the same people.  And these narratives were trotted out often coupled with scary stories about the bond markets.  The problem is that these narratives weren’t really sound macro views.  They were mostly just political nonsense:

  • Someone whose ideology is centered around an anti-Fed agenda saw QE and thought up a narrative about how the “money printing” would ruin the economy.
  • Someone with an anti-government agenda saw the budget deficit and said it would cause interest rates to rise.
  • Someone who thinks the bond markets control US government bond yields would result in bond vigilantes moving the Fed off its target rate.
  • Someone who thinks “inflation is always and everywhere a monetary phenomenon” saw QE and said inflation was coming.
  • Someone who misunderstood the difference between the EMU and the US monetary system saw the Greek crisis and predicted a similar outcome for the USA.

These weren’t just bad predictions.  They were often political narratives or incorrect understandings that were pushed by people with a certain agenda.  And even though the narratives have failed these same people have refused to alter their thinking.  And that’s a real shame because we’re all worse off for it as this flawed thinking continues to influence people’s portfolios and the world’s policy decisions.