Is the US bond market more scared of the government's deficit than inflation itself?
As in 2024, with polls open for the midterm elections, the cost of living remains voters’ top priority. As for investors, their primary concern in the aftermath of the Federal Reserve’s first rate hike since 2023 isn’t inflation in particular. Rather, it’s the federal government’s deficit.
TL;DR
- Investors' primary concern after the Federal Reserve's rate hike is the federal government's deficit, not inflation.
- The U.S. economy is exhibiting a K-shaped pattern with a booming stock market and a collapsing bond market.
- Rising bond yields reflect concerns about high government deficits and heavy debt issuance.
- Unlike previous rate hike campaigns, the current bond market sell-off is attributed to fiscal policy, not the Fed's inflation control measures.
- Investors are acting as 'bond vigilantes,' punishing politicians for continued high government spending.