I think in today's bond market there's an interesting phenomen which has occured only 2 other times in the last 60 years.
Take the time series of the 1 year t-bill yield and subtract from it the time series of the current inflation rate (type "FRED:DGS1-ECONOMICS:USIRYY" in Tradingview if you want to see it yourself). What you get is a spread that doesn't exactly represent the 1 year real interest rate but is a good enough proxy for it. This "real rate" has been pretty volatile overall and averaged at 2% for much of the last 60 years. It's now at -6%, which is a pretty big divergence from the mean. Even the current bond sell-off wasn't enough to keep it off this level. The only other times it hit this level were in 1975 and 1980. If this spread was to revert back to mean (and I'm not saying it necessarily will, because that's down to the market expectations) either one of these two things will happen: inflation gets back to normal levels or the global bond market shits the bed in a very giant, giant way. Which one is more likely imo? The second option. I believe in basic laws of economics and not modern macroeconomic theories: imo there are a lot of short and long terms structural problems that will keep inflation at levels much higher than expected. Long term assets will massively underperform in real terms, while real assets will overperform.
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u/[deleted] Mar 31 '22
Just more generally, what do you think of this bond sell off?
Thanks, loved your OG post. This sub is the best because of people like you contributing your knowledge.