Weekly Market Commentary 07/13/2018

Where are the bond vigilantes? It was not that long ago that the circumstances similar to what we are seeing today would have brought the posse out in force. Inflation just hit a six-year high, the economy is booming, the jobless rate is hovering near the lowest level since the 1960s, the government is running an ever-expanding budget deficit and the nation is generating more output that it is capable of producing. Taken together, this would appear to be a potent mix riling up bond investors fearful that the purchasing power of their fixed income stream will be eroded by runaway inflation. To be reimbursed for that erosion risk, the bond vigilantes would ordinarily demand more compensation, driving bond yields higher. As well, they would urge – and expect – the central bank to join in the anti-inflation fight by stepping more aggressively on the monetary brakes.