Is the bond market wrong about inflation?
The bond rally suggests that markets are sanguine about inflation, but the gold rally suggests inflation is a real threat.

US GDP had its worst fall on record in the second quarter. It shrank by 9.5% from the previous quarter, a 32.9% slump in annualised terms. “That is... the equivalent of the first three years... of the Great Depression accelerated into just three months”, says Tim Price of Price Value Partners.
GDP is a backward-looking indicator, but US weekly jobless claims have increased for two weeks running as the virus has forced renewed closures in southern states, says Alexandra Scaggs for Barron’s. The bond market is now sending a “warning signal” about the recovery, says Giles Coghlan on fxstreet.com. The yield on US ten-year Treasury bonds hit its lowest level since early March last week, while three- and five-year yields hit new record lows. Bond yields move inversely to prices, so falling yields imply gains for bondholders.
The bond rally is perplexing for two reasons. Firstly, governments have issued vast tranches of new debt to pay for the pandemic, which would ordinarily cause their borrowing costs (implied by bond yields) to rise, not fall.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The US budget deficit hit $864bn in June, a figure Dan Morehead of Pantera Capital says surpasses “the total [US state] debt incurred from 1776 through the end of 1979” in nominal terms. In 2020 a country can rack up “two centuries of debt in one month”. Bondholders have central-bank purchases to thank for keeping yields low.
Secondly, the bond rally suggests that markets are sanguine about inflation, says Tommy Stubbington in the Financial Times. That’s partly because monetary stimulus after the financial crisis did not deliver the inflationary wave many predicted. Yet the recent gold rally suggests that concern about rising prices is growing. If the gold buyers are right, the bond market has got it “very wrong”.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
Families suffer £20,000 lost income growth – are you feeling the pinch?
Average incomes for working age families have increased by just 7% in the past two decades, research suggests
-
How to achieve a secure retirement, as more retirees admit to struggling with debt
Twenty-six percent of retirees now have unsecured debt – a sharp rise compared to two years ago – with many underestimating how much a typical retirement costs
-
Small UK industrial stocks are hidden gems
Opinion Ed Wielechowski of the Odyssean Investment Trust highlights three of his favourite British small-cap industrial stocks
-
Aurora Innovation is running on empty – is it overvalued?
Aurora Innovation, a maker of self-driving trucks, may have promised far more than it can deliver
-
'Ride the recovery in emerging markets': Gustavo Medeiros of Ashmore Group tells MoneyWeek
Interview What's the outlook for emerging markets? Gustavo Medeiros, head of research at Ashmore Group, gives his analysis and reviews progress in developing economies
-
What is the Enterprise Investment Scheme and should you have one?
The Enterprise Investment Scheme is tax-efficient and potentially lucrative. Taking a chance on the scheme could trim your family’s IHT bill, says David Prosser
-
The alcohol industry is suffering as consumers sober up – is it still worth investing in the sector?
Changing consumer tastes are rocking the alcohol industry, but the best players are adapting their strategies. Buy them while their shares are still cheap
-
A strange calm in credit
Corporate bond markets remain remarkably relaxed, with yields that offer little compensation for risks
-
'The City's big bet on green finance fails to pay out'
Opinion Insurers and banks are backing away from “green finance”, and there is not much sign of the green boom we were promised. That’s a problem for the City
-
Six top investment trusts for smaller stocks
Liquidity constraints mean investment trusts are best placed to seize the juiciest opportunities