The bond market is all about predicting the future. And recently, the bond market has been moving.

Yields are mostly coming down, and there’s been volatility in the price of bonds. Seems like the bond market is trying to say something. 

“Typically the bond market, and specifically the U.S. Treasury market, is a very good predictor of where the economy is headed,” said Rick Polsinello, a senior market strategist at the Franklin Templeton Institute. 

Investors can buy Treasurys that last three months, two years, 10 years, or 30 years. And if they’re going to lock their money up for that amount of time, they need to have an idea of what could affect their investment in that amount of time.

So bond market message number one comes from the near future, a couple years out, where we see the rate of return on Treasurys, AKA yields, falling.

“The bond market is telling us that it’s expecting the Fed to cut imminently, and the debate has shifted from ‘Will it cut?’ to ‘How much will it cut?’” said Steve Laipply, global co-head of bond ETFs at Blackrock.

The primary thing that affects short-term yields is the Federal Reserve’s interest rates. So if short-term yields move down it’s because investors think those Fed rates will come down. And weak jobs numbers have made it clear the Fed needs to cut rates sooner and faster than a lot of people thought. 

Bond market message number two comes from the longer-term Treasurys: 10-year T-notes, 30-year bonds.

“The long-end yields have moved down, but by a smaller amount,” said Anders Persson, chief investment officer of Nuveen.

Something is keeping long-term yields high, and it’s the fact that long-term bond investors have long-term things to worry about — like inflation.

“Inflation is not coming down, expected to come down, you know, to, sort of, the Fed’s 2% target anytime soon,” Persson said.

Inflation is a bond killer, so if investors think there’s gonna be more of it down the road, they’re gonna demand a higher long term yield. 

On top of inflation, investors have to worry about the national debt. If the government gets overstretched in the future it may have to pay more to bond investors in the future to borrow. 

“Debts are high, deficits are high, the government continues to accumulate more debt,” said Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute.  

Investors of today are baking all that uncertainty in.

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