Bond Market Reflections

Contemplating the continuing "conundrum" of a dovish bond market and a (relatively) hawkish Fed, we came across these pertinent lines in Alan Blinder’s Central Banking In Theory and Practice: 

I was not at the Federal Reserve in late 1993 and early 1994, just before it started tightening monetary policy. But I am fairly certain that the Fed’s own expectations of future Federal funds rates were well above those presumably embedded in in the term structure at the time, which seemed stuck at the unsustainably low level of 3%. A year later, I was at the Fed and I am certain that the market’s expectations of how high the funds rate was likely to go–to as high as 8% according to various asset prices and Wall Street predictions–were well above my own. In both cases, the markets got it wrong–once on the high side and once on the low side. In both cases, the faulty estmate was largely attributable to misapprehensions about the Fed’s intentions. And in both cases, the bond market swung wildly when it was corrected….. There is no more reason for central bankers to take their marching orders from bond traders than to take their orders from politicians. [emphasis added]

Astute readers will realize that Blinder’s position on marching orders doesn’t square entirely with positions we’ve previously taken. However, his personal experiences lend support to our assessment that the bond market is not currently priced in line with economic fundamentals.