Students of economics 101 are taught that economic recoveries come with rising interest rates, which means bond prices are falling. This is why people are a bit confounded by the fact that interest rates have remain subdued five years into the current recovery.
However, you’d actually have a hard time seeing a pattern of rising rates during recoveries in recent history.
Jan Loeys of JP Morgan’s global asset allocation team explains.
“Bonds tend to have a hard time selling off if central banks are not tightening,” he said. “The steadily lower growth rates over the last 3 recoveries have induced steadily lower policy rates, which in turn have created faster and a greater number of asset bubbles that have been imploding before inflation has a chance to accelerate and central banks can move into a tight stance.”
Things just aren’t as simple as you’re taught in entry-level economics.
“Chart 2 shows how in the last 3 cycles, US bond yields are no longer rising through the economic expansion.”
Take one look at this chart and you’ll appreciate that the relationship between interest rates (like the 10-year Treasury yield) and economic growth is not a simple one.
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