So this is different. Inflation has never been this high, with bond yields this low.
Rates should, in theory, be a way to gauge what market participants think about future inflation. Higher inflation would cripple today’s coupons, so again, in theory, investors would demand higher rates for that risk.
But investing isn’t about theories. At some point, we need to acknowledge reality. It’s probably time we update our models, mental and otherwise.
There are varying explanations as to why this relationship may no longer hold, and I think the most compelling one is that there are so many price-insensitive buyers.
Allison Schrager recently highlighted this, showing that 54% of U.S. debt was purchased by the fed and government last year.
Tracy Alloway has been all over this concept of “flows before pros,” first writing about it in 2017.
In a world with so much money, buyers are as important as fundamentals. This concept is widely discussed, but I think still underappreciated. It impacts everything and isn’t going away any time soon.