TLT - Why The Bond Market Is No Longer The 'Smart Money'

2024-05-29 10:20:54 ET

Summary

• The bond market has lost its predictive power regarding the economy and inflation due to changes in its structure and size.
• Liquidity in the bond market has declined as the market has grown, making it more difficult to sell large amounts of bonds without affecting prices.
• The U.S. Federal Reserve's track record of forecasting future inflation, interest rates, and economic growth is poor, undermining the bond market's ability to provide useful information for economic forecasting.

This article focuses on when and how the bond market lost its predictive power regarding the economy and inflation. This is relevant because the bond market is enormous, and serves as a core asset class for central banks and for investment portfolios.

From Small & Fast to Big & Slow

The bond market has historically been known as “smart money”, in contrast to equity markets that are more of a mix of smart money and so-called dumb money.

This is because the bond market is generally characterized by professional investors and traders, whereas the equity market is a mix of all sorts of different investors and traders, including many hobbyist retail investors....

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