Bond Market’s Message

(1) Fed, not inflation, is driving bond yields higher. (2) Fed isn’t behind the curve on inflation. (3) Peak bond yield likely to be 3.50% over next 12-18 months. (4) Bond Vigilantes Model compares nominal GDP growth and bond yield. (5) Fewer reasons to be vigilant since 2008 as central bankers eased to avert deflation. (6) Inflation Premium Model based on unmeasurable r*. (7) Yield Curve Model posits that shape of yield curve indicates outlook for short-term interest rates. (8) Bond yield discounting not only investors’ inflationary expectations but also Fed’s perceived inflationary expectations and policy response. (9) Does the federal budget deficit matter? (10) Foreign bond yields matter.