Why Treasuries Became Risky Again

Macroeconomic conditions and monetary policy expectations drive current bond market volatility, specifically through the "perceived policy reaction function"—the mechanism by which markets anticipate Fed responses to inflation and unemployment. Treasury bonds have become increasingly "stock-like" since 2000, exhibiting a positive correlation with equity markets that forces investors to demand higher risk premiums. This shift, coupled with the transition from demand-driven recessions to supply-side shocks, complicates the Fed's ability to maintain a gradual, inertial policy path. Carolin Pflueger, an associate professor at the University of Chicago, notes that while long-term inflation expectations remain anchored, the perceived riskiness of U.S. debt and the potential for hegemonic shifts in global financial power significantly influence current yield levels. Ultimately, the market’s assessment of central bank credibility and the changing nature of bond risks remain central to understanding recent interest rate trends.