What happens to the bonds?

There are no guaranteed trades in investing. Even “secure”
strategies such as Straddles/Strangles, which involve buying a call and a put
option on the same stock, can result in losses.

The same is true for events. For example, many expected
Treasury yields to fall once the Fed announced a change in monetary policy. But
even though it cut rates twice this year, bond
prices continued to fall.

The conclusion is simple: it is important to act based on
the situation rather than simply on assumptions, as many factors drive price
movements, and it is only sometimes possible to take them all into account.

Returning to the outlier movement in US government bonds,
inflation has been falling for six months, and the Fed has cut rates twice, but
the 10-year Treasury yield is still above 4%, and the dollar index is over 105.

So why aren’t investors acting?

Some believe it is due to the “buy the rumor, sell the fact”
theory. Essentially, investors could have bought bonds before the Fed lowered
rates and started selling after the move.

That might be part of it, but it’s not the whole story.
Other factors are at play, such as concerns about slowing disinflation, which
could lead the Fed to revise its dovish rhetoric.

According
to the economic calendar, US CPI and core CPI data will be released on
Wednesday (estimates: 0.3% m-o-m, 3.3% y-o-y), followed by PPI and core PPI
data on Thursday (estimates: 0.2% m-o-m).

And if the figures released this week don’t confirm it yet,
the problem is far from going away, as Trump’s policies, especially import
tariffs, could raise prices even if he argues otherwise.

Tariffs are taxes paid by U.S. companies, not foreign
sellers, and will likely pass those costs on to consumers. Thus, estimates from
the Yale Budget Lab suggest that a trade war could raise CPI by 5.1%.

Finally, the growing
U.S. debt keeps breaking new records and now exceeds $35 trillion. Although
Trump promises to fix it, analysts say his plans could lead to a $7.8 trillion
debt increase.

With the tax cuts included, the budget deficit seems
unlikely to improve. So, it is still unclear how to get the country out of a
vicious cycle, or more precisely, of an uncontrollable debt bubble.

The U.S. economy may be doing well today, but down the road
— perhaps sooner than expected — this could lead to serious problems, and the
bond market suggests that some investors are having second thoughts.

This article was written by FL Contributors at www.forexlive.com.