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The Bond Bear That Cried Wolf

The Bond Bear That Cried Wolf by Jay Leopold, Columbia Threadneedle Investments

  • For the past several years, bond bears regularly cautioned the Federal Reserve’s zero-interest-rate policy was unsustainable, calling for higher rates in the foreseeable future. Bond investors have become gradually more cautious over the past year.
  • In contrast, until the past month, equity markets had not discounted an initial round of Fed tightening like other markets.
  • The recent violent correction reflects a rising risk premium being built into equity prices that had already existed in other areas of global markets, and it is a healthy response.

Almost every child knows the Aesop’s fable “The Boy Who Cried Wolf.” As the ancient story goes, a child tending sheep mischievously alarmed others of a potentially dangerous threat by crying “WOLF!” The town folk rushed to protect the flock, realized it was a false alarm and went back to their business. Several other times the boy cried, the neighbors again came running. Each time, the alert was misplaced. One day, a real wolf appeared. The panicked boy screamed for help. But weary of the incorrect alarms, the community ignored the warning and the sheep were eaten.

For the past several years, bond bears regularly cautioned the Federal Reserve’s zero-interest-rate policy was unsustainable, calling for higher rates in the foreseeable future. Since markets often discount changes to future economic growth many months in advance, these warnings periodically gained traction with investors, prompting...


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