May 2024 Newsletter: The Bond Market Is the “Dumb Money” Now

What should we do about this fact? Does this throw off market signals about what the bond market is telling us, since the “bond market” in reference to actual private bond investors is less than half of the recent Treasury demand, while a semi-government institution is more than half of Treasury demand, against a backdrop of record Treasury supply

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 man

In the Treasury market, following several consecutive days of deteriorating conditions, market participants reported an acute decline in market liquidity. A number of primary dealers found it especially difficult to make markets in off-the-run Treasury securities and reported that this segment of the market had ceased to function effectively. This

Back during the 2010-2014 period in particular, the Fed was buying Treasuries as a somewhat optional way to boost the wealth effect, provide extra liquidity, and recapitalize the banking system.

One basic metric I like to look at is nominal GDP growth relative to bond yields. Whenever nominal GDP growth is structurally higher than bond yields, investors are usually better off owning just about anything other than bonds on a multi-year timeframe. In contrast, when bond yields are higher than or similar to nominal GDP growth (yellow areas in

When the bond market entered its golden era and became known as smart money, the U.S. federal debt-to-GDP ratio was only about 30%. That was a small and nimble market, and one that was effectively priced by professional traders.

From the early 1980s through the 2000s, interest rates were high and steadily heading down, which meant bond prices were steadily going up while also paying their holders a hefty income along the way. And quite usefully, their price action tended to be inversely correlated with equities; bond prices normally went up in recessions while stocks went

Back during the March 2020 sharp stock market crash, investors initially fled into bonds as one would expect in a risk-off crisis, meaning that bond yields went down and bond prices went up. But then as the dollar index spiked, the crisis became bad enough that there became a large number of forced sellers of bonds in order to get dollars and servi

Back in 2008 and 2009, there was a lot of base money creation, but not a big fiscal transmission mechanism to transfer it to the broad money supply. The fiscal deficit basically just balanced out the major loan losses of the time, so the net result was anti-deflationary but not greatly inflationary.