Bond market points to lower US growth


The US bond market has been sending out signals that the much-vaunted US economic recovery could be short-lived. This is indicated by a persistent fall in yields over the past months after they rose earlier this year in expectation of higher growth due to the Biden administration’s stimulus measures and the Federal Reserve’s continuing support.

The Federal Reserve headquarters in Washington, DC (Source: Wikimedia/Rdsmith4)

The stock market, fuelled by the massive inflow of money from the Fed, is reflecting perplexity over the direction of the economy. After a significant fall on Thursday, the three major Wall Street indexes closed at record highs yesterday.

In what the Wall Street Journal described as a “topsy-turvy” week, the S&P rose 1.1 percent, following its largest one-day fall since the middle of last month, the Dow rose 448 points or 1.3 percent, and the NASDAQ was up by 1 percent as investors moved in to “buy the dip.”

However, the falls in bond market yields may be a surer indicator of longer-term trends. On Thursday, the yield on the benchmark 10-year Treasury bond fell to 1.29 percent, down from a high of 1.75 percent at the end of March. Rising bond prices and the consequent fall in yields (the two have an inverse relationship) are generally taken as an indication of lower growth as investors seek a safe haven.

A New York Times article noted that whereas the expectation had been for higher growth, the shift in the bond market pointed to a “reversal of that narrative” suggesting that a “period of slower growth” could lie ahead.

In its economic projections the Fed has insisted that the present rise in inflation will prove to be “transitory.” Now the opinion is being voiced that this characterisation may apply to growth as well.

One of the major factors pushing in that direction is the escalation of COVID infections both in the US and globally as a result of the Delta variant.


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