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Bond Market Dispels Inflation Alarm

As Fed winds down quantitative easing, investors' behavior indicates pessimism on economic growth and more fear of rate hikes than of inflation.

By Daniel Kruger, Bloomberg | Updated on September 15, 2014

As the Federal Reserve winds down its third round of unprecedented stimulus, one thing has become increasingly clear in the bond market: The U.S. economy just isn’t going to grow enough to upend demand for Treasuries.

While more than $3 trillion of debt purchases since 2008 have helped the U.S. recover from its worst recession in seven decades, bond-market indicators for long-term inflation, growth, and funding costs are all lower now than they were at the end of the central bank’s first two rounds of quantitative easing.

Investors’ diminished outlook for the economy could help prevent an exodus from the $12.2 trillion market for Treasuries and contain long-term borrowing costs for the government, companies, and consumers as the Fed moves toward raising interest rates. After demand for the benchmark 10-year note this year pushed down yields by almost half a percentage point, to 2.61 percent, implied yields now suggest investors don’t foresee them increasing to 3 percent for at least another year.

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