Blockworks Macro: The Bond Market Will Take the Stock Market Down With It (Here’s Why)

While most traders gravitate towards stocks or options on stocks, the bond market tends to drive other asset classes. That’s because the bond market’s moves can impact interest rates, or the cost of money.

Plus, the bond market tends to represent capital that investors want to put at as little risk as possible. Right now, the bond market is enjoying its highest levels of interest rates in 15 years. But dangers may lurk ahead.

Today so much of the bond market, particularly government bonds, are bought and sold by central banks. Consequently, the yields on those bonds may not represent the true demand for investment dollars.

That could also set up the potential for a sudden move in the bond market that spills over to other asset classes.

One such move could be a repricing for higher inflation expectations. The bond market yields peaked last October.

However, since then, it’s been clear that inflation has remained sticky. Bond investors may want higher yields to compensate for that risk of persistent inflation. That means lower bond prices.

But as bond yields move higher, capital is attracted to bonds. The idea of a steady return at a high enough rate can even drive investors out of stocks.

To understand the full dangers that could lead to trouble in the bond market, click here.