Bond Selloff Threatens U.S. Economy Amid Rising Deficit Fears -

Bond Selloff Threatens U.S. Economy Amid Rising Deficit Fears

October 5, 2023

Threat to U.S. Economy’s Soft Landing

The recent plummet in bond prices is poised to jeopardize the prospects of a smooth deceleration of the U.S. economy. Market participants are bracing for elevated borrowing costs to persist, fueled by worries about a ballooning federal deficit. Bonds maturing in a decade or more have suffered a 46% fall since reaching a pinnacle in March 2020, a marginally lesser dip than the 49% slump in U.S. stocks following the dot-com bubble burst.

Barclays on the Impact of the Bond Selloff

Barclays has asserted that the recent bond selloff’s scope is so severe that stocks could potentially be costlier than they were a month prior. The bank suggests a single scenario that could prompt a substantial rally in bonds – a marked downturn in risk assets in the approaching weeks. Barclays highlighted the “Federal Reserve’s likely persistence with quantitative tightening and its continued position as a net Treasury seller”. The escalating bond supply due to the burgeoning deficit also contributes to an increase in the term premium.

Anticipated Impact of Labour Market Conditions

After the ADP jobs report indicated a weakening labor market, Treasury yields retraced from multi-year peaks this past Wednesday. Market players will keep a keen eye on the forthcoming non-farm payrolls report, as robust data could ignite further selloff in bonds. “Due to the American economy’s resilience and a scarcity of bond buyers, market volatility will persist,” says Edward Moya, a senior market analyst at OANDA.

Views from the Asset Management Sphere

Michael Craig, who heads asset allocation at TD Asset Management, contends that the uncomplicated part of curbing inflation has transpired. However, he cautioned that the remainder would pose a significant challenge, as the bond market seems to be indicating a need to nudge the economy towards a recession. In contrast, Investing Group Leader Lawrence Fuller maintains that the panic selling of bonds is unrelated to economic fundamentals. He ascribes it to misguided messaging from Federal Reserve officials, who insist that short-term rates may need to be higher for longer to quell inflation. Consequently, any incoming economic data exceeding expectations heightens fears of prolonged elevated rates.

2 thoughts on “Bond Selloff Threatens U.S. Economy Amid Rising Deficit Fears”

  1. As an individual with vested interest in the economy, the current bond selloff and its potential threat to a smooth deceleration of the U.S. economy has got me on edge. The prospects of soaring borrowing costs ignited by skyrocketing federal deficit is worrisome; it’s like watching your favourite puzzle crack open bit by bit.

    The 46% fall in long-term bonds since March 2020 feels like a painful deja vu reminding me of the 49% slump in U.S Rockstocks post dot-com bubble burst. Information from Barclays indicating stocks might end up more expensive than a month back amplifies my anxiety; things seem to be spiraling out rapidly and so are my worries!

    With predictions about an increasingly volatile market due to weak labor market data, I might need to rethink my investment strategies and brace myself for some potentially rocky financial waves ahead! It’s definitely a wake-up call to stay abreast with incoming economic data, which may dictate more movements in the bond market.

    • While I understand your concerns about the bond selloff and its potential impact on the U.S. economy, it’s important to remember that a decrease in bond prices isn’t necessarily a cause for alarm. Market fluctuations are inherent in any economy, and such changes can offer attractive yield opportunities.
      Contrary to your comparison of the current situation with the post-dot-com bubble burst, it’s worth noting that, historically speaking, severe market downturns have typically been followed by robust recoveries. Additionally, I believe comparisons between two different periods could lead to unnecessary panic since they often overlook a myriad of factors unique to each scenario.

      Furthermore, you seem to be largely focusing on corporate stocks and long-term bonds while disregarding other investment options like short-term bonds or treasury bills which are deemed safer…

      And lastly, uncertainties always exist in markets and focusing just on negatives could overshadow numerous growth opportunities presented during tough times. Volatility is not always detrimental; it often opens up new opportunities for seasoned investors with experience in navigating turbulent waters. Thus, strengthening your knowledge base might render these ‘rocky financial waves’ less intimidating.


Leave a Comment