Bond Traders Look Ready to Call the Fed’s Bluff

Given all the angst about the stock market in recent weeks, including Monday’s 1.66 percent tumble in the S&P 500 Index, it would be easy to overlook the goings-on in the bond market. But doing so risks missing some critical signals about the economy and Federal Reserve policy that might both add to the anxiety and offer a glimmer of hope.

First, the bond market is signaling that the economy is less than ideally healthy. That can be seen in the performance of two-year Treasury notes, which have rallied for six consecutive trading days, pushing yields lower in the longest such streak since 2016. The monthly National Association of Home Builders/Wells Fargo Housing Market Index report released Monday only ratified those concerns as it tumbled by the most since 2014 in an ominous sign for a critical part of the economy. At the same time, the Atlanta Fed’s GDPNow index, which aims to track growth in real time, shows the economy is most likely expanding at about a 2.75 percent rate, a big deceleration from the past two quarters. The upshot is that the bond market is pricing in only about 1.5 interest-rate increases over the next year from the current range of 2 percent to 2.25 percent, compared with the Fed’s projections of four hikes. It’s not as if the Fed hasn’t overpromised before. In early 2014, when its target rate was 0.25 percent, the Fed was saying that it would rise to 1 percent by the end of 2015 and 2.25 percent a year after that. Instead, rates rose to 0.5 percent in 2015 and 0.75 percent in 2016 as the economy underperformed and inflation was slower than expected.