The Importance of Pelosi and Taiwan on Bond Swings

Bonds, Bears, the Fed and Nancy Pelosi

A bear market in bonds has been a long time coming — it’s about four decades since the last one ended. And after the US saw inflation hit its highest levels in 40 years (since the bond bull market started), fueling bets that the Federal Reserve would embark on the most aggressive tightening campaign in a generation, it seemed that the bear market had finally started.

But cold feet remain. Yields have dropped precipitously in recent weeks, despite the lack of any clarity that inflation is over. And that led to an extraordinary trading session Tuesday as they boomeranged back upward. House Speaker Nancy Pelosi can claim a starring role with her fraught visit to Taiwan. Barring only the two worst days of the first Covid shutdown, and the Monday in June when the Fed leaked its intention to hike by 75 basis points at its next meeting, this was the biggest daily gain for 10-year yields in five years:

How has this happened? Over the last 40 years, whenever the trend appeared to be about to break, the Fed would respond with cheaper money and bring yields back down again. Its emergency response to the pandemic helped rates to drop to record lows in 2020. With the return of inflation, that pattern appeared to have broken, leading to this year’s surge in yields. But since June, it has been as though the market trod on a rake. Ten-year yields dropped by a full percentage point: