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Does the New Bond Market Conundrum Tell Us Anything? If So, What?

Brad DeLong Reason

Date Posted:: September 3, 2014
Is Database:: Database

The bond market conundrum highlights a divergence btw inflation expectations and real interest rate forecasts, with the 5-Year TIPS yield collapsing to -1.4%/year by mid-2013 and the 6-10 year expected rate+term premium dropping to 0%/year. @delong

The bond market conundrum highlights a divergence between inflation expectations and real interest rate forecasts, with the 5-Year TIPS yield collapsing to -1.4%/year by mid-2013 and the 6-10 year expected rate+term premium dropping to 0%/year. This suggests a decoupling of inflation expectations from real growth, indicating pessimism about the real economy's future state. Despite tapering expectations, long-term interest rates have trended downward, challenging traditional views that rates would normalize with economic recovery. The persistence of a 2.5%/year inflation break-even since 2004 further complicates interpretations, as it suggests stable inflation expectations despite falling real yields. This conundrum raises questions about the reliability of market signals as indicators of future economic conditions and the effectiveness of monetary policy in achieving targeted inflation and growth rates.

on inflationary expectations. had to read this closely, I don't really"believe" in a natural rate of interest (if that makes sense) but I get it "...Over 2007 to mid-2010, a constant 6-10 year expected rate+term premium of 2.3%/year (save for the height of the financial crisis itself, with the yield spike from fears of TIP illiquidity). Ms Market appears confident that whatever happens, by 6-10 years out the ocean will be calm and flat again at the global savings glut Wicksellian real natural rate of 2.3%/year. And over 2007 to 2010 we have (a) the steep fall in the 5-Year TIPS yield as Ms Market expects aggressive monetary policy over a five-year horizon, (b) the step rise in the yield as Ms Market thinks something very bad might and then is happening to TIPS liquidity, (c) the return to normal slow-recovery views of the 5-Year TIPS yield like these previously seen over 2003 to mid-2005, and (d) the further collapse of the 5-Year TIPS yield to zero as Ms Market recognizes that this is not your normal slow recovery, that there are few if any of Tim Geithner’s “green shoots”, and that it will be a long slog...Over mid-2010 to mid-2013, the collapse in the 5-Yr TIPS yield to -1.4%/year and the collapse in the 6-10 year expected rate+term premium to 0%/year as Ms Market recognizes that this time-with QE∞, permanent underemployment, and secular stagnation-really is different... Since late 2013, a belief by Ms Market that the Federal Reserve is still planning to start serious normalization-but with a start date that seems to be pushed out an extra week for every week that passes-coupled with a dawning recognition that we are unlikely to be anywhere close to normal in years 6-10, hence the late-2013 belief that you should bet on the economy being at a semi-normal Wicksellian real natural interest rate in 2020 was probably wrong...If I were an inflation hawk I would say that right now Ms Market expects us to get the economy in five years to a place where it is then doing its normal thing that it does when we target 2%/year inflation-and that is a powerful sign that our current taper policy is on the right track.But when I look at the sub-zero 5-Year TIP and at the 0.6%/year 6-10 Year TIP I read that as Ms Market decoupling its inflation expectations from its real growth and real interest rate expectations, and not in a good way..." Does the New Bond Market Conundrum Tell Us Anything? If So, What?: Tuesday Focus for September 2, 2014 byBrad DeLong Posted on September 2, 2014 at 12:26 pm

We are very far away from anything I would like to call “social science” or even “forecasting” here-“haruspicy”, or perhaps“plastromancy”captures it better…

With that caveat, I have been struck for a while by what we see when we break up the 10-Year TIPS rate into its 5-Year TIPS and its 6-10-Year Forward TIPS components:

If you read this graph as showing the expectations of Ms Market over the next five and the subsequent five years, we get the following for the market’s ideas about the real interest rate:

1) Over 2003 to mid-2005, a constant 0-5 year rate and a 6-10 year expected rate+term premium that falls from 3%/year to 2.3%/year, presumably as Ms Market adjusts to the idea that there might actually be a global savings glut and hence a lower Wicksellian real natural interest rate in the long run:

2) Over mid-2005 to 2006, a rise in the 0-5 year rate to 2.3%/year or so and a 6-10 year expected rate+term premium that remains steady, presumably as Ms Market now expects more of a full-employment economy and a stronger demand for funds to finance real investment than had seemed likely before mid-2005:

3) Over 2007 to mid-2010, a constant 6-10 year expected rate+term premium of 2.3%/year (save for the height of the financial crisis itself, with the yield spike from fears of TIP illiquidity). Ms Market appears confident that whatever happens, by 6-10 years out the ocean will be calm and flat again at the global savings glut Wicksellian real natural rate of 2.3%/year. And over 2007 to 2010 we have (a) the steep fall in the 5-Year TIPS yield as Ms Market expects aggressive monetary policy over a five-year horizon, (b) the step rise in the yield as Ms Market thinks something very bad might and then is happening to TIPS liquidity, (c) the return to normal slow-recovery views of the 5-Year TIPS yield like these previously seen over 2003 to mid-2005, and (d) the further collapse of the 5-Year TIPS yield to zero as Ms Market recognizes that this is not your normal slow recovery, that there are few if any of Tim Geithner’s “green shoots”, and that it will be a long slog:

4) Over mid-2010 to mid-2013, the collapse in the 5-Yr TIPS yield to -1.4%/year and the collapse in the 6-10 year expected rate+term premium to 0%/year as Ms Market recognizes that this time-with QE∞, permanent underemployment, and secular stagnation-really is different:

4) In 2013, taper-talk: Bernanke’s announcements interpreted as signaling that the FOMC thinks the question is not whether but when to normalize, and the consequent rapid semi-normalization of the 6-10 year expected rate+term premium and rapid rise of the 5-Year TIPS to near 0%/year:

5) Since late 2013, a belief by Ms Market that the Federal Reserve is still planning to start serious normalization-but with a start date that seems to be pushed out an extra week for every week that passes-coupled with a dawning recognition that we are unlikely to be anywhere close to normal in years 6-10, hence the late-2013 belief that you should bet on the economy being at a semi-normal Wicksellian real natural interest rate in 2020 was probably wrong:

Is there actually an intelligent entity-some kind of distributed anthology intelligence suffering from some sort of aphasia-that we call Ms Market that actually has expectations and whose expectations we can read off of bond yields? And if there is such an entity, is there any reason we should pay any attention to her expectations either as guides to some central tendency of investor sentiment or as forecasts that are in their own right worth incorporating into our own information sets, and hence into our own forecasts? Who knows? I don’t.

What I do know is that if we are willing to divine some market-sentiment-macro-expectations factor out of TIPS and other yields, the past eight months or so have seen Ms Market become much more pessimistic about the state of the real economy and thus of real interest rates six to ten years hence.

The one thing casting doubt on this interpretation is the failure of the 6-10 year inflation break-even to decline. It has been hanging out there at 2.5%/year (with notably rare exceptions) since 2004:

If I were an inflation hawk I would say that right now Ms Market expects us to get the economy in five years to a place where it is then doing its normal thing that it does when we target 2%/year inflation-and that is a powerful sign that our current taper policy is on the right track. But when I look at the sub-zero 5-Year TIP and at the 0.6%/year 6-10 Year TIP I read that as Ms Market decoupling its inflation expectations from its real growth and real interest rate expectations, and not in a good way.

The new bond market conundrum is thus yet another reason for the sun to appear dark in my eyes…

David Beckworth uses a decomposition of the long term interest rate into an average expected real short-term interest rate, average expected inflation, and a term premium to argue that it’s the term premium has been steadily falling…. James Hamilton writes that… while the… 10-year Treasury has been falling… the 5-year yield has held fairly steady…. Something happened this year to persuade people that rates in the future (for 5 to 10 years from now) were going to be lower than they had been expecting. Robin Harding and Michael Mackenzie write that this is unprecedented…. James Hamilton writes that it’s hard to attribute it to changing perceptions about the Fed… DeLong, Brad, "Does the New Bond Market Conundrum Tell Us Anything? If So, What?" Washington Center for Equitable Growth, September 2, 2014. Available at:http://equitablegrowth.org/2014/09/02/new-bond-market-conundrum-tell-us-anything-tuesday-focus-september-2-2014/

Jeff Sommer… David Beckworth… Marc to Market…. James Hamilton writes that as the U.S. economy returns to healthier growth, many of us expected long-term interest rates to return to more normal historical levels. But the general trend has been down…. In… 2005… Greenspan noted that long-term interest rates trended lower in recent months even as the Federal Reserve raised the level of the target federal funds rate by 150 basis points… to the expectations theory of interest rates were long rates are the geometric average of expected future short rates plus a risk premium that would usually increase with duration of the instrument….

Jérémie Cohen-Setton:Blogs review: The bond market conundrum redux:“Are we seeing a new version of the Greenspan 2005 conundrum?… Fed tapering was widely expected to push up US yields. Instead, US yields have fallen since the beginning of the year…. A successful explanation of this new conundrum cannot just rely on a flight to safety… it also needs to rationalize why 5-year… and 10-year yield have diverged….

The extremely-sharpJérémie Cohen-Settonhas a roundup:

How To Buy A Trade Surplus

Joseph Gagnon and Nishtha Agrawal Peterson Institute For International Economics

Date Posted:: July 29, 2026
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Using annual data for 146 countries from 1985 – 2024, Gagnon and Agrawal find that a $1 increase in a country’s cyclically adjusted fiscal deficit is associated with a 22–38¢ increase in its current-account deficit, with most of the estimates ~30¢.

Table 1 presents regression results. The evidence strongly suggests that governments can buy current account surpluses. Raising the fiscal balance by $1 tends to raise the current account by $0.30 [Table 1, first row]. Issuing $1 of domestic currency debt to buy foreign-currency assets (foreign exchange intervention) raises the current account anywhere from $0.20 to $1.00, with a value around $0.50 to $0.60 most plausible [Rows 2 though 5]. NOF is Net Official Flows, and NOS is the stock of net official foreign assets. The most powerful policy, as exemplified by Norway and Singapore, is to run a fiscal surplus and invest the proceeds in foreign-currency assets. In that case, $1 buys a current account surplus of around $0.80 or so. The results are supported by annual panel regressions of current accounts and cross-country stock regressions of cumulated current accounts or stocks of net foreign assets. The estimated effects in the panel regressions may be biased down slightly by incomplete modeling of lagged effects.

Honey, Who Shrunk the U.S. Income Surplus?

Matthew Higgins and Thomas Klitgaard Liberty Street Economics

Date Posted:: May 19, 2026
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The US net international investment position worsened by about $16tn between 2019 and 2025, driven by roughly $5.5tn in net inflows and $10tn in valuation losses, as higher rates hit a larger net liability stock, raising interest rate-sensitivity.

Foreign holdings of U.S. financial assets are immense, with official estimates putting their current market value at $69 trillion. U.S. holdings of foreign assets are also impressive but much smaller, at $41 trillion. The shortfall in U.S. foreign assets relative to foreign liabilities has been mounting for decades. Yet U.S. investment income receipts—in profits, dividends, and interest—comfortably exceeded income payments until recently. Payments on U.S. assets owned by foreign investors represent a servicing burden for the U.S. economy. Profits, dividends, and interest payments that would otherwise accrue to domestic investors instead flow abroad. Given the need to sell U.S. assets to finance ongoing trade deficits, this servicing burden seems likely to mount. The related buildup in the U.S. net liability position in interest-bearing assets will also make the income balance more sensitive to swings in interest rates. This increased sensitivity is already in evidence. At present, with the asset-liability gap at -$15 trillion, a 1 percentage point increase in U.S. and foreign interest rates would subtract $150 billion from the U.S. net income balance. (A 1pp fall in rates would result in a similar improvement.) Only five years ago, a 1 percentage point rise in rates would have subtracted $100 billion.

Takeaways by Macro Roundup^® AI

The $28tn gap between foreign holdings of U.S. assets ($69tn) and U.S. foreign holdings ($41tn) drives mounting income payments abroad.
A 1pp interest rate rise now subtracts $150bn from U.S. net income—50% more than five years ago—as the $15tn net.
Ongoing trade deficits force asset sales to foreign investors, leading to larger servicing burdens and greater exposure to interest rate.

Don't Blame America's Current Account Deficit On the Dollar

Maurice Obstfeld Peterson Institute for International Economics

Date Posted:: April 14, 2026
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Noting the minimal relationship between official liabilities and the CA, Obstfeld argues that the reserve currency role of the dollar is not the cause of the trade deficit. He urges reduction in the US fiscal deficit to increase national saving.

Critics of the dollar's global role have argued that foreign official dollar purchases (labeled US incurrence of official liabilities in the figure) feed one-for-one into US current account deficits. To illustrate the true loose relationship between these two variables, the figure shows both of them over the 2003–25 period, as percentages of GDP. US net incurrence of liabilities to official holders, reported with a minus sign as in standard balance-of-payments methodology, is usually far too small to mirror the US current account deficit. And since roughly 2014, net official financial inflows have fluctuated around zero as the current account deficit has widened. To be sure, the strong international demand for dollars may make the dollar stronger against foreign currencies than it would be otherwise, [but] while they imply a smaller current account balance, they do not necessarily imply a negative balance and certainly not a rising negative balance, especially when foreign dollar reserve holdings have been shrinking relative to global economic activity (as figure 1 also implies). The euro is the world's second reserve currency, yet the euro area has a current account surplus. Britain had surpluses up until World War I despite issuing the world's premier global currency and hosting its leading financial center. Reducing the US fiscal deficit materially and sustainably is the most important US policy prerequisite for global current account rebalancing.

Takeaways by Macro Roundup^® AI

I cannot generate the requested takeaways because the source material contains no quantitative data, numerical findings, or comparative metrics. The.
To produce compliant takeaways, I would need data such as: current account deficit figures, dollar reserve holdings, asset sale volumes.

Understanding Global Imbalances

IMF Staff International Monetary Fund

Date Posted:: April 7, 2026
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As of 2024, the US, China, Germany, and Japan accounted for ~2/3 of total global imbalances (the sum of the absolute value of each economy’s current account deficit and surplus). The US CA deficit is between 0.8 and 1% of world GDP.

Four economies—the US, China, Germany, and Japan—account for roughly two-thirds of global imbalances. The US deficit—equivalent to 4% of GDP as of 2024—has been financed by capital inflows and portfolio investors seeking dollar assets. Germany and Japan’s surpluses have been driven by high saving rates, joined by substantial surpluses in China beginning in the 2000s. Oil-exporting countries’ surpluses fluctuate with commodity prices, creating episodic contributions to global imbalances. In earlier decades, surpluses and deficits were more cyclical: countries moved in and out of surplus depending on business cycles, commodity shocks, and exchange rate movements. While there is no standard definition of persistence, the average duration of a deficit or surplus spell roughly doubled since the 1980s. Persistent surpluses over the past two decades have accumulated into very large net foreign asset positions for economies such as China, Germany, and Japan, with each holding net foreign assets equivalent to 3–3.5% of global GDP in 2024. Similarly, persistent deficits have built up into large net liability positions, most notably in the US where the NIIP stands at about -25% of global GDP in 2024, underscoring the central role of the US position in global balances (Figure 6).

Takeaways by Macro Roundup^® AI

Surplus durations have doubled since the 1980s, accumulating massive foreign asset positions for China, Germany, and Japan.
Understanding Global Imbalances.
Germany and Japan’s surpluses have been driven by high saving rates, joined by substantial surpluses in China beginning in the.

China’s Cheap Money Is Shaking $9.5 Trillion Global Loan Market

Bloomberg Staff Bloomberg

Date Posted:: March 5, 2026
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China’s savings glut and “monetary easing to counter slowing growth” are manifesting themselves in credit expansion overseas, as bankers seek higher yields than they can get at home amidst deflationary pressure.

Chinese banks, flush with low-cost funds, are reshaping parts of the global loan market, underscoring how deflationary pressures in the world’s second-largest economy are increasingly influencing competition with international lenders. Much like US and European manufacturers who have long complained about being undercut by cheaper Chinese rivals, bankers at global institutions now say they’re facing the financial equivalent: being priced out of some of Asia’s most sought-after borrowers as Chinese lenders extend cheaper credit across borders. Enabled by Beijing’s monetary easing to counter slowing growth, Chinese banks are expanding overseas lending amid weakening domestic credit demand. That edge may prove even more significant as the Iran crisis threatens to upend global energy markets, raising the likelihood that major central banks will hold off easing interest rates amid mounting uncertainty.

Tariffs and "International Payments Problems"

Matt Klein The Overshoot

Date Posted:: March 4, 2026
Is Database:: Database

The worsening of the US net international investment position – from -20% of US GDP in 2010, to -53% pre-pandemic, and to -89% as of the end of 2025Q3 – reflects valuation gains on US stocks relative to stocks in the rest of the world.

Foreigners are accumulating more financial claims on Americans than Americans are accumulating on foreigners across every single category: FDI, stocks, bonds, physical currency, deposits, and loans. Foreign official investors supposedly have been mild sellers of U.S. assets over the past 12 months, but the standard measure does not include state-affiliated institutions that operate on behalf of foreign governments. Meanwhile, the U.S. net international investment position has swung massively over the past few years, from -20% of U.S. GDP in 2010, to -53% of U.S. GDP on the eve of the pandemic to -89% as of the end of 2025Q3. Almost all of that reflects massive valuation gains on U.S. stocks relative to stock markets in the rest of the world. The good news is that actual U.S. indebtedness has not meaningfully increased, and the methods used to assign market values to FDI in the U.S. and abroad make the situation look more extreme than it is. (U.S. FDI assets in Ireland are overwhelmingly big tech and big pharma, for example, but the market value of those assets is imputed based on the performance of the maker of Kerrygold.) The bad news is that, if the current level of the NIIP is unsustainable, the easiest way for it to revert is for U.S. stock prices to fall dramatically.

The bond market conundrum highlights a divergence btw inflation expectations and real interest rate forecasts, with the 5-Year TIPS yield collapsing to -1.4%/year by mid-2013 and the 6-10 year expected rate+term premium dropping to 0%/year. @delong

Using annual data for 146 countries from 1985 – 2024, Gagnon and Agrawal find that a $1 increase in a country’s cyclically adjusted fiscal deficit is associated with a 22–38¢ increase in its current-account deficit, with most of the estimates ~30¢.

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The US net international investment position worsened by about $16tn between 2019 and 2025, driven by roughly $5.5tn in net inflows and $10tn in valuation losses, as higher rates hit a larger net liability stock, raising interest rate-sensitivity.

Is rising interest rates widening America's foreign investment income gap?

Takeaways by Macro Roundup® AI

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Noting the minimal relationship between official liabilities and the CA, Obstfeld argues that the reserve currency role of the dollar is not the cause of the trade deficit. He urges reduction in the US fiscal deficit to increase national saving.

Is the current account deficit driven by dollar demand or asset sales?

Takeaways by Macro Roundup® AI

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As of 2024, the US, China, Germany, and Japan accounted for ~2/3 of total global imbalances (the sum of the absolute value of each economy’s current account deficit and surplus). The US CA deficit is between 0.8 and 1% of world GDP.

Takeaways by Macro Roundup® AI

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China’s savings glut and “monetary easing to counter slowing growth” are manifesting themselves in credit expansion overseas, as bankers seek higher yields than they can get at home amidst deflationary pressure.

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The worsening of the US net international investment position – from -20% of US GDP in 2010, to -53% pre-pandemic, and to -89% as of the end of 2025Q3 – reflects valuation gains on US stocks relative to stocks in the rest of the world.

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