The hottest Bond Markets Substack posts right now

Interest rates in 2023 showed little change, challenging the idea that the Fed is solely responsible for their movements. It's more about market dynamics and inflation.
An inverted yield curve has traditionally been seen as a warning sign for recessions, but recent events in 2023 suggest it isn't always accurate. The economy remained stable despite the inversion.
Looking forward, inflation will play a key role in determining interest rates in 2024. If inflation continues to drop, long-term rates might go down too.

Markets react to surprises in economic data, not just the data itself. A deviation from consensus forecasts often triggers market movements.
The size of the economic surprise matters. The impact can vary based on the type of data, with some like inflation having stronger effects.
Economic indicators like inflation, unemployment, PMIs, and consumer confidence are crucial for investors to watch. Interest rates also play a significant role.

Bond markets give hints about future economic growth and inflation. It's important to watch these markets to understand the economy better.
In 2018, the bond yield curve flattened, meaning short-term rates increased. This change often gets people worried about potential recessions.
Both bond and stock markets reacted similarly in 2018, with investors feeling more cautious and demanding higher prices for taking risks.

Risk premiums for equities have decreased significantly since the peak during the market crisis, returning to pre-crisis levels. This means investors are demanding less extra return for holding riskier stocks now compared to late 2008.
Bond default spreads, which widened dramatically during the crisis, have also fallen back to where they were before, indicating a recovery in confidence in bond markets.
Emerging markets faced severe challenges during the crisis, but by early 2010, their sovereign default spreads dropped back to pre-crisis levels, suggesting improved market stability and investor sentiment.

Bond ratings help investors understand the credit risk of borrowing companies. Ratings agencies provide this information because individual investors often lack the knowledge to assess it themselves.
Bond rating changes can affect market prices, but often prices react before the rating changes happen. This shows that while ratings are useful, they can be slow to reflect current risks.
Though there are concerns about conflict of interest because ratings agencies are paid by the companies they rate, it's important to recognize that many factors contribute to bond performance, not just these ratings.

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The price of risk is the extra return investors seek to earn when taking on risky investments. It’s shaped by how much people are willing to spend and their feelings about market conditions.
Risk premiums can change based on investors' fears and greed. When fear is high, people usually want higher risk premiums, which can lower the prices of investments.
There are different ways to evaluate market risk, like looking at bond yields or estimating earnings for stocks, and these methods help us understand if investments are overvalued or undervalued.

The U.S. government isn't likely to default soon, but people's trust in its ability to manage debt has been shaken. Once investors start worrying about default, it's hard to restore that confidence.
The market is already reacting to fears of a U.S. default, with increased costs for protection against it. A formal downgrade from agencies may happen soon, but it will likely not come as a shock.
If there is a downgrade, the cost of borrowing for U.S. companies and risk-free rates will likely rise. This could lead to lower stock prices, although some changes in market prices may have already factored in this risk.