The Current Drivers of the Bond Market

• The three main issues affecting the bond market are a bill increasing the deficit, sticky inflation, and the challenge of balancing inflation with economic slowdown and unemployment.
• We are now in a multi-year cycle of rising interest rates, suggesting rates will continue to rise to reflect fair value in bonds. The era of zero interest rates and money printing was declared over, with a comparison to the economic environment of the 80s and 90s.
• The new cycle has elevated inflation and higher real rates, suggesting a shift in the economic environment post-COVID.
• After significant losses in the bond market over recent years, we are now entering a period where the bond market may stabilize due to higher coupons and lower durations.
• Lastly, government spending inefficiencies and the lack of significant budget cuts in recent legislation have contributed to larger deficits and higher interest rates.

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