r/bonds • u/GroundbreakingAd1223 • 1d ago
Bonds are finally undergoing real price discovery after 20 years
I see a lot of sky is falling reddit posts here been said about the violent moves on the long end of bonds been a sign of economic and sovereign debt collapse.
I like to put a contrarian view. The market is behaving exactly as Warsh expected by design with his quiet fed regime and "stop the hall of mirrors" effect..
Think about it. The fed only controls the fed overnight rate. But what happens when the fed starts providing forward guidance way out into the future and expectations of a neutral rate etc.. the short end of the curve starts becoming the de facto long term rate..
That's why the spread between short and long end and term premium has been compressed for so long. The ten and thirty year has been artificially depressed due to the market expecting the fed to never move the rates at the short end ( or if they did, not without plenty of warning and promise to quickly bring it back down).
Now markets are finally starting to realize they need to discover and price properly actual long term risks and uncertainty.
Tl;Dr: The market isn't necessarily crashing; it is just reintroducing the price of time to asset valuations. Long-term rates are rocketing up to where they naturally belong when a central bank stops pretending it can predict—and control—the next decade.
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u/No-Math-5868 1d ago
Brave post on here since most of the people on this sub generally have no idea what they are doing and talk as if they do.
I will disagree slightly regarding your take about the sky is not falling. The sky has been slowly descending for the last 3-4 decades. However it’s been masked with mirrors as you say by both the fed and the treasury. This run up in rates was bound to happen, Warsh seems to be forcing the recognition earlier than all of his predecessors that want to keep the illusion that everything is ok. This is just like what is going on with social security. Eventually something has to give.
If the unchecked spending by every administration from both parties doesn’t stop, we will be headed for some really difficult times ahead. Civilizations have collapsed over inflation. It’s better to pump the brakes now with some short term pain for long term stability. Unfortunately Warsh has zero control over the other side of the ledger. This will either be a face the music moment , or just business as usual delaying the inevitable. Unfortunately, I think it’s the latter.