Legend has it that the incoming Clinton Administration was stymied in its big spending ambitions by warnings from the bond market that it would send interest rates soaring. (In 1993 the 10-year Treasury note in January was around 5.8%, and it went up to nearly 8 percent in 1994.) James Carville famously said at the time that if he was ever reincarnated he wanted to come back as the bond market, because it was apparently the most powerful force on the planet.
A funny thing happened the last few months. Everyone thought that when the Federal Reserve starting cutting short term interest rates (the only rate the Fed can actually control), the rest of the yield curve would follow, as it usually has for the last half century. Instead, the interest rate on the 10-year Treasury, which had been slowly falling, started rising again, and has been very volatile in recent weeks. Likely this reflects financial markets worried about our yuuuge budget deficit, and a lack of confidence that the Fed will stay the course in reducing inflation. Last week the “bond vigilantes” went on a rampage, pushing medium and long-term interest rates back up to their highest level in almost two years.
Here’s how our current moment compares to other interest rate cycles of the last 50 years:
Meanwhile, the stock market is increasingly volatile. Is it another bubble? Well, there is this:
But even if it isn’t a bubble about to burst, there are reasons for thinking market performance may be cool the next few years:
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